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Defense Orders Surge in July

RFP
Durable goods orders surged 11.2% after rising an upwardly revised 7.7% in June. A 77% jump in defense aircraft orders piloted those gains. Orders for vehicles remained strong, rising nearly 22% as vehicle plants continued to ramp up following lockdowns in March and April. Gains excluding the volatile transportation component rose a more moderate 2.4% in July while nondefense aircraft orders continued to plummet.

Core capital goods orders, which strip out defense and aircraft and signal plans for business investment, rose 1.9% in July. That follows a 4.3% rise in June. Core orders are now tracking less than 2% below year-ago levels, suggesting a stronger and more sustained rebound for manufacturing than what we are seeing in the service sector. Aside from the surge in motor vehicles and parts, computers and communications equipment bounced back from declines in June. Orders for electrical equipment, appliances and components were also strong, reflecting some of the recent strength in the home building, buying and remodeling.

Core capital goods shipments, which feed directly into current quarter business investment, rose 2.4% in July, after rising 3.8% in June. That suggests a strong rebound in business investment in the third quarter. Again, vehicle production played a key role in fueling gains, despite some problems with staffing at plants in areas with a high number of COVID-19 infections. In recent weeks, GM has turned to its white collar workers to staff a plant hit hard by COVID-related absences, something that has riled union leaders.

Today’s data suggest that real GDP is poised to rise at close to a 30% annualized pace in the third quarter after contracting 33% in the second quarter. Much of that growth will depend upon the ability to sustain the pace of the recovery in August and September. High frequency data suggests that we have slowed considerably in recent weeks and that risks are to the downside.

The good news for the corporate sector comes on the heels of a sharp improvement in confidence among CEOs, which this month exceeded the highs of January. Much of that improvement in confidence was driven by the fact that CEOs now have plans in place to deal with COVID-19 and any additional weakness in the economy. The bad news is that those plans include cuts to both jobs and investments. Consumers, who suffer the consequences of those decisions, are much less sanguine about the economy: Consumer confidence sank to a six-year low in August. The lapse in supplemental unemployment benefits no doubt contributed to that retrenchment.

Bottom Line
The economy is poised for a rebound in the third quarter after a sharp contraction in the first half of the year. The question is whether we can keep those gains going in the fourth quarter; that depends on the course of the virus. The confidence that CEOs have in managing through another major outbreak by cutting jobs and investments underscores the fragility of the gains.

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