Despite Trade and Recession Fears, Durable Goods Support Higher GDP Growth

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Many reports in the media suggest the decade-long recovery and growth of the U.S. economy is in trouble. Gross domestic product (GDP), the official metric for measuring or scoring the growth of the economy, is nowhere near that 3% goal that the public has heard over and over for the past two and a half years or more. With tariffs having escalated into a trade war, and with the media flashing “recession” in every headline that it can, many people would be tricked into thinking everything is falling apart in America.

So far, the reality is that the U.S. economy has not actually fallen apart. Slower growth is one thing, but overall negative growth is another issue entirely. The economy was given a look at the big-ticket items purchased by consumers and businesses with a look at strong durable goods orders in the month of July.

Considered that each month’s report on durable goods orders can be very volatile due to the nature of the big-ticket items. Durable goods in any given month can look stellar in a crummy economy or they can look crummy in a stellar economy.

New orders for durable goods rose by 2.1% in July. This beat the Econoday consensus estimate of 1.2% growth and was even above the June level, which was revised to +1.8% from a prior report of +2.0%. Aircraft orders remained strong, while the core capital goods orders remained steady and held up better than the media headlines might have indicated.

It turns out that orders for civilian aircraft (aka, Boeing) were up 49% in July after a 101% gain in June and following several months of weakness. There was also 0.5% gain in motor vehicle orders during July.

There is also a look at durables minus civilian aircraft, vehicles and additional transportation equipment. This came in at −0.4% in July, after being revised to a gain of 0.8% from 1.2% in June.

Another look for a “core durable goods” is seen in nondefense capital goods orders excluding aircraft. This still posted a 0.4% gain, but that was down from a handily revised 0.9% gain (from 1.9% initially) in June. There was a 1.9% gain in communications equipment and a 1.1% gain in electrical goods within the capital goods segment.

Before thinking the media is just juicing up interest for a recession and wider economic slowdown fears, there were some weak readings seen in July. Overall, primary metals orders were down by 1%, followed by a drop of 0.9% in fabricated metals.

Unfilled orders rose by just 0.1% in July, but that broke a streak of three consecutive months of decline. Inventories rose by 0.4% in July, but total shipments fell by 1.1%.

All in all, those data points add up to a slight negative for future production and are less supportive of continued strong payroll gains. Still, with a total net positive number for the economy as a whole, there is also a risk that the “data dependent” Federal Reserve might get a sigh of relief over just how fast it wants to cut interest rates compared with what the markets have predicted.

Another consideration for total economic impact is that close to 70% of U.S. GDP now comes from activities tied more toward consumer spending than it does from manufacturing. And the United States is also a services and materials-based economy at this stage in the game. The 2.1% rise in total durable goods orders in July translated to a $5.0 billion gain to $250.4 billion, or just over $3 trillion on a static annualized run rate. The U.S. GDP is measured at roughly $21 trillion today.

The strength in the stock market on Monday, following Friday’s tariff and trade war fueled sell-off, was based more on President Trump’s indication that China wants to get back to the negotiating table than it was based on relief that durable goods held up better than expected in July.

That said, the Federal Reserve Bank of Atlanta has updated its GDPNow forecast for third-quarter GDP to 2.3% growth from a prior 2.2% reading. Its update for Monday said:

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2019 is 2.3 percent on August 26, up from 2.2 percent on August 16. After this morning’s advance durable manufacturing report from the U.S. Census Bureau, a decrease in the nowcast of the contribution of nonresidential equipment investment to the third-quarter real GDP growth from 0.30 percentage points to 0.26 percentage points was offset by an increase in the nowcast of the contribution of inventory investment to the third-quarter real GDP growth from -0.47 percentage points to -0.43 percentage points.

The major equity indexes were still up 0.7% to 0.8% in midday trading on Monday, while crude oil was up just 11 cents at $54.28 per barrel and gold was up $2.10 at $1,539.70 per ounce. In interest rates, the yield in the 10-year Treasury was still just 1.522%, and the yield on the 30-year Treasury bond was only 2.023%.


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