Durable goods orders trampled expectations

May durable goods orders jumped 1.7%, a huge departure from expectations of a decline of -0.8%. April orders were revised up to 1.2%. The report indicates few areas of weakness with broad-based increases in shipments and new orders. The outliers were new orders for defense aircraft and defense capital goods with declines of 35.4% and 14.7%, respectively. Defense-related orders had expanded the month before.

Transportation rose 3.9% on a big jump in civilian aircraft orders of 32.5%. Those orders offset the large declines in defense orders. The large commercial air manufacturers ramped up orders and deliveries ahead of the Paris Air Show in June. Motor vehicles and parts orders also increased 2.2% after being flat in March and April, helping to support a 0.4% increase in inventories.

Excluding transportation, durable goods orders increased 0.6% after falling in April. There were some other areas of weakness including computers, which declined 2.3% and communications equipment which declined 1.6%. Outside transportation, strength came from electrical equipment, capital goods and machinery. Manufacturing construction spending has surged over the last year from computer and electrical manufacturing infrastructure. That could help buoy capital goods and machinery orders for some time.

Shipments excluding transportation rose 0.4% after falling for three consecutive months. That is an input into GDP calculations and suggests a stronger second quarter for GDP. Nondefense capital goods orders excluding aircraft, a proxy for future business investment, beat expectations with a 0.7% increase, though April was revised down to 0.6%.

Bottom Line

The May durable goods report indicates that business spending may be regaining momentum. This is the third consecutive increase in the headline durable goods orders. This report could help steel the resolve of the Federal Reserve for a July rate hike after the June pause. That, combined with likely another rate hike before the end of the year, will increase capital costs and create headwinds for orders and shipments in the months ahead.