Durables Stronger Than Headline Indicates

Durable goods orders edged 0.1 lower in July after being revised up for the month of June. Much of the drop can be traced to a sharp 48.9% decline in aircraft orders after a sharp rebound in aircraft orders for the year. Orders for motor vehicles and parts surged after large upward revisions to June. Vehicle producers scrambled to rebuild inventories when chip shortages left dealer lots nearly empty.

Taiwan, which manufactures most of the world’s computer chips, was hit by the Delta variant in July; some plants were idled. That has hampered their ability to resolve global supply chain problems, in addition to a fifty year drought. The island nation has been forced to ration water, a critical input for chip production.

Durable goods excluding transportation rose 0.7%, after being revised up slightly in June. Core durable goods orders, which exclude aircraft and defense orders and more closely track business investment plans, flatlined during the month but from a higher plateau in June. Core orders jumped 16.4% from a year ago in July, just as investment was taking off.

We saw better gains outside of the vehicle sector. Primary and fabricated metal orders picked up, reflecting vehicle orders and a push by manufacturers to ramp up and rebuild inventories using new, more efficient machinery. Machinery orders are running close to 18% above year-ago levels.

Orders for computers and electronics fell slightly. The gains in computer orders were not enough to offset s drop in orders for communications equipment. Investment in computers and electronics surged at the onset of the pandemic when schools and businesses moved online; the level of investment in new technologies remains elevated.

Orders for defense equipment, largely aircraft, rose more than 5% for the month but are down relative to a year ago. Defense orders are now off at a double-digit rate from a year ago.

Core shipments, which feed directly into the GDP calculations, rose 1% after being revised up for June. That is consistent with our view for a pickup in business investment in the third quarter, which we will need now that consumer spending is slowing.

Manufacturing inventories rose 0.5%, while the backlog of unfilled orders slowed. Backlogs in the manufacturing sector are expected to take well into 2022 to clear. Delta is disrupting both supply chains and demand. There is a risk that manufacturers could overshoot on inventory rebuilding in 2022, given the impact Delta is having on demand. That is a major shift from where we were just a month ago, when backlogs were still compounding in the face of stronger global demand.

Bottom Line
Durable goods orders and shipments suggest that manufacturers are beginning the long, arduous process of replenishing empty shelves. How long that takes and what it means for inflation has been complicated by the Delta variant. Higher prices and an end to stimulus checks are also taking a toll on demand.

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