Demand for capital goods is stronger than headline numbers

October  25, 2024

September durable goods orders fell 0.8%, near the market consensus of -1%. August orders were revised lower to -0.8% from flat.

Transportation orders fell 3.1% in September, dragged lower by a sharp decline in civilian aircraft orders, down 23%. A strike by machinists last month at an aircraft manufacturer is likely responsible for the weakness. There was a bright spot in the overall transportation component as orders for motor vehicles and parts climbed 1.1% after negative readings the past three months. Excluding the impact of transportation orders, headline durable goods orders rose 0.4%, beating the consensus expectation of -0.1%. That follows an upwardly revised 0.6% rise in August.

Despite the solid reading in orders ex-transportation, the rest of the September report was mixed. Fabricated metals orders rose 2.1% while primary metals orders increased just 0.5%. Orders for computers and electronics, electrical equipment and machinery were unchanged to slightly lower.

Core orders, which represent capital goods orders excluding defense and aircraft and represent a proxy for future business spending, rose 0.5% after increasing 0.3% in August. Although ongoing election uncertainty has repressed order flow in the purchasing manager surveys for manufacturing firms, it has not entirely eliminated capital spending. S&P Global has reported the October manufacturing purchasing managers' index (PMI) was little changed at 47.8 versus 47.3 in September. Below 50 readings indicate deteriorating business conditions.

Nondefense capital goods shipments excluding aircraft, which serve as a proxy for nonresidential investment spending in the current quarter, fell 0.3% in September after declining 0.1% in August. That could shave perhaps 0.1% from our current estimate of 5.3% annualized growth for business fixed investment. Despite this modest recalibration, our third quarter estimate still outpaces the second quarter growth rate of 3.9%.