US: Underlying details of the durable goods report were solid - RBS

Research Team at RBS, notes that the US durable goods orders surged in July by 4.4%, boosted by a 90% jump in civilian aircraft orders and a 16% rise in defense (defense aircraft bookings were up 20%).

Key Quotes

“However, even excluding the contribution from aircraft, the underlying details of the report were solid. Excluding defense and aircraft, orders rose by 1.0% on top of a 0.5% increase in June. Moreover, nondefense capital goods orders exaircraft (a proxy for business investment) climbed by 1.6%, the strongest showing in a year.

The July results represent the first good news on capex in many months, and sets the stage for a rebound in business investment in Q3 following three straight quarterly declines (a string of losses that have never before been seen outside of recession). Indeed, after falling by 2.6%, 9.5% and 3.5% annualized in Q4, Q1 and Q2, respectively, we look business spending on equipment to rebound to a 5% annualized pace in Q3.

Meanwhile, durable goods inventories expanded by 0.3%, the first increase following six straight monthly declines. Though just one piece of the overall picture, the inventory bounce in this sector supports our expectation that renewed stockpiling will boost real GDP in Q3 (after an outright inventory drawdown subtracted 1.2 percentage points from the headline advance in Q2). In the third quarter, we look for overall real GDP to advance at a 3.5% annualized pace (which would mark the largest increase in the headline measure in two years). Excluding inventories, trade and the government sector, we look for real final sales to private domestic purchasers to grow by 3.2% annualized in Q3, the best result in a year (helped by the rebound in capex) and versus 2.7% in Q2.”