Durable Goods: Strong Finish, Fresh Start?
We look at the solid finish for durables in a very eventful wrap to 2023 in the economy, the markets, UST, and inflation.
The typically lumpy durable numbers came in very strong for Nov 2023 at +5.4% after a -5.1% decrease in Oct while ex-defense rose by 6.5% and ex-transportation rose by +0.5%.
This data wraps the last of durables goods releases on a positive note, and the handicapping will start up for the new year on whether a lower UST curve (and where on the curve it is lower and by how much) can change the math on the investment lines for corporate sector capex.
The ex-defense and ex-transportation metrics are still signaling favorable trends, but the UST curve and broader bullishness of late will still need to translate into a steady base of orders in 2024 if the classic cyclical reinvestment model holds true to form.
The above chart frames the time series for headline new orders for durable goods and drives home that we have not seen a pop like this for a while given a mix of headwinds including some defensive inventory decisions tied to recession risk fears, supplier chain snarls, or other industry-specific issues (e.g. aircraft production disruptions).
With durable manufacturing as one of the relative laggards in the real economy and one also showing a lack of pricing power in aggregate (e.g., recent mild durable goods deflation in the CPI releases), the trend line in the manufacturing rate of production, shipments, and new orders all play into the “soft landing vs. no landing” theme and whether Goldilocks can keep a grip on life in the economy in 2024. This last release was a good sign. Recent industrial production stats were at least stable (see Industrial Production: Steady Course, No Signs of Fade or Flourish 12-15-23).
The next round of numbers into 1Q24 will play into expectations around reshoring and investment decisions broadly with interest rates driving the cost of inventory and economics of capex generally. The durable orders and shipment release and related tables calls for what is basically a “check-off exercise” where you look at a range of industry line items. The exercise includes a focus on the capital goods line ex-defense and ex-aircraft given how big those sectors are in the lineup and how they can whip around.
The main takeaway this month is solid numbers for durables, but that also comes with the reminder that the services sector is the main event in the ongoing inflation handicapping. We had a more closely watched PCE inflation release that came alongside durable goods today that shows good news on the inflation front. Durables includes a critical collection of industries to watch in the broader economy, but right now much of the attention will justifiably remain on the consumer, jobs, and inflation watch. We look at the PCE collection in a separate note to be posted today.
The above chart offers the angle on ex-Transportation, and we see solid numbers in 2023 context and over the past six months. The defense and commercial aerospace industry combined has tens of thousands of suppliers, so in some ways ex-defense and ex-transport is like saying “autos ex-wheels, aircraft ex-wings” given the scale of the activity. The ex-Transport slice offers one of several ways to get back to a look at old school capital goods subsectors. The Transportation industry lines are also broken out in the chart below.
The above chart frames some of the key line items on a Month-on-Month (MoM) basis and Year-over-Year (YoY). We look at a Not Seasonally Adjusted (“NSA”) LTM chart also that frames LTM vs. calendar years 2022 and 2021.
Durable Goods ex-Transport and Durable Goods ex-Defense both came in positive and on a favorable trend looking across the columns. The numbers drive home how lumpy the month to month action of orders is by definition and especially for major commercial aircraft and most any major defense orders.
The above chart frames the shipment side of the ledger, and we see a wave of positive numbers again. Different industries have different revenue recognition rules and practices, but shipments drive home the scale of economic activity that send signals on a lot of ancillary effects on supporting infrastructure industries (notably freight and logistics and finance).
As we get more into single name coverage and commentary, bellwethers such as Deere, Caterpillar, Auto OEMs, Boeing, and the prime defense contractors, who are all major movers of supplier chains and related services, will be giving their views on how the UST curve is shaping their customer and dealer plans. The same is true if we ever get the budget mess cleaned up in Washington.
Contributors:
Glenn Reynolds, CFA glenn@macro4micro.com
Kevin Chun, CFA kevin@macro4micro.com