Core Durable Goods New Orders See Gentle Uptrend in July
Economic news and commentary for August 24, 2023
US Durable Goods New Orders
The volatility in durable goods readings over the course of the year has been wild. So far, there hasn’t been a headline move below 1% or above -1%, and that hasn’t changed in July. Durable goods new orders fell a sharp -5.2% MoM to start the third quarter which reverses strong readings in the second quarter of 2.0% MoM in May and 4.4% MoM in June. All of these readings have been distorted by abnormally large movements in transport orders, so it is important to filter those out. Durable goods orders excluding transportation industries were actually up 0.5% MoM which builds on the small gain of 0.2% MoM in May. The YoY rate of growth increased to 1.1% which is the highest since the beginning of the year.
The major distortions in the report came from the nondefense and defense aircraft segments which were down -43.6% MoM and -10.9% MoM respectively. Altogether, the transportation equipment sector fell -14.3% MoM which was the main cause of the -5.2% MoM headline decline. In other segments, order growth was a lot better. Machinery orders grew 1.1% MoM after a weak June. Primary metals and fabricated metal products both extended gains last month, up 0.1% MoM and 0.7% MoM respectively. Computers and electronics were the only industry to see a negative print at -0.1% MoM. In total, the core nondefense capital goods (ex-aircraft) segment moved up 0.1% MoM and 2.3% YoY in July which is about what the consensus estimates suggested would happen.
In terms of unfilled orders and inventories, there was not much movement at all. The same core segment saw a -0.1% MoM decline in unfilled orders and no movement in inventories at all in July. The data suggest that durable goods firms feel a bit frozen in the current economic environment as the outlook remains largely cloudy. The build-up of inventories that occurred in response to supply chain issues has remained largely stagnant since the beginning of the year. On an annual basis, capital goods inventories were up 5.0% YoY, down from the 5.6% YoY in June and the 9.8% YoY at the beginning of 2023. Little to no inventory growth means that there will be little to no help from that segment of GDP in the third quarter if the trend continues. And as unfilled orders stop being filled and new order growth continues to decelerate, there will be little help from corporate investment as well.
The good news is that the first durable goods orders report of the third quarter does not point to a contraction. But at the same time, it does not support the strong 5.8% Q3 2023 GDP growth estimate given by the Atlanta Fed (as of August 16th). Somewhere in between is a happy middle ground where the US avoids a recession and glides into a soft landing with easing inflation and low growth.
Still to come…
10:00 am (EST) - US EIA Natural Gas Report
11:00 am - US Kansas City Fed Manufacturing Survey
4:30 pm - US Fed Balance Sheet
Morning Reading List
Other Data Releases Today
The French business climate indicator edged down -1 pt to 99 in August, and the employment indicator fell -5 pts to 101. The manufacturing climate fell -5 pts to 96, and the services climate fell -2 pts to 100.
The UK CBI Distributive Trades Retail Sales index fell to -44% in August, down from -25% in July. This is the lowest since March 2021. Selling price growth did not ease much (at 73% in August, 77% in May) despite the decline in sales.
Jobless claims fell -10,000 to 230,000 last week. The insured unemployment rate fell -0.1 ppts to 1.1%. Continued claims were down -9,000 to 1.70 million.
The Chicago Fed National Activity Index improved to 0.12 in July, up from -0.33 in June. Indicator breakdown:
Production: 0.18 (prev -0.36)
Consumption: 0.02 (prev 0.00)
Employment: -0.02 (prev 0.01)
Sales: -0.05 (prev 0.02)
US New Home Sales
New Home Sales Post Solid Gain in July (Wells Fargo) - Consumers have recently pulled back on homebuying amidst higher mortgage rates. Yet up to this point, low resale supply and builder incentives such as price discounts and mortgage rate buydowns have helped shield the new home market from the broader slowdown. New home sales rose 4.4% in July, bouncing back from June’s decline and solidifying the upward trend that began last fall.
New Home Sales Increase in July (NAHB) - Low existing inventory and solid demand more than offset rising mortgage rates and elevated construction costs to boost new home sales last month.
New Single-Family Home Sales Increased 4.4% in July (First Trust Portfolios) - New home sales rebounded in July following a small decline the prior month, remaining resilient despite a recent surge in mortgage rates. Sales have been on an upward trend in the past year and are now 31.5% above the low in July of 2022. However, they still remain well below the pandemic highs of 2020
Canada Retail Sales
Retail sales eke out another gain in June finishing second quarter on a weaker not (TD Bank) - Following a soft reading in May, today's marginal gains gets the second quarter's to -0.1% annualized – a notable step down from a 2.6% pace in Q1. This puts personal consumption expenditures on track for 1% annualized growth in Q2. Looking ahead, spending might still regain its footing with the help of government's grocery rebates. These were aimed at supporting lower-income households that typically have a higher propensity to consume. Like Stats Canada's advance estimate, our internal data points to a rebound in monthly spending in July.
Canadian retail sales are no match for US boom (CIBC) - Goods consumption looks to have swung from a boost to a drag on growth in the second quarter, leaving business investment as a more important source of growth. Still, Q2 GDP is tracking only slightly below the Bank of Canada's 1.5% forecast. We've pencilled in a final quarter point hike for September, but that's a fairly close
call and one that could be impacted if the flash estimate for July GDP looks weak enough.
Canadian Retail Sales: A Mixed Bag (BMO) - A better-than-expected retail sales report was supported by autos, which masked weakness in other sectors. GDP looks to be on track for a modest decline in June, slowing the pace of quarterly growth as higher rates continue to bite.
US
US economy close to stalling in August as flash PMI falls to 50.4 (S&P Global) - US business activity growth came close to stalling in August, according to flash PMI data compiled by S&P Global. The survey shows that the service sector-led acceleration of growth in the second quarter has faded, accompanied by a further fall in factory output.
Businesses Want Remote Work, Just Not as Much (Liberty Street Economics, NY Fed) - The enormous increase in remote work that occurred during the pandemic was a response to a temporary public health crisis. Now that the pandemic has passed, just how much remote work will persist and how much are businesses comfortable with? Results from our August regional business surveys indicate that more than 20 percent of all service work and 4 percent of all manufacturing work is currently being done remotely, nearly identical to what was reported a year ago, and this amount of remote work is expected to persist in the year ahead.
Europe
Stagflation builds the case for short-term real and nominal sovereigns (Saxo Bank) - European and UK PMIs and stubborn inflation expectations paint the perfect stagflation picture for the old continent. While the BOE might need to tighten further, the ECB is unlikely to hike rates again. As the hiking cycle ends, short-end government bonds provide enticing returns. However, short-term inflation linkers remain in the spotlight as inflationary pressures might resurface in the last quarter of the year.
Macro Watch - Gas price higher, but not back to summer 2022 peak (ABN AMRO) - Bigger European gas buffers limit the risk of shortages. The gap in gas supply left by Russia has largely been filled by other gas suppliers. The LNG regassification challenge is largely solved. Share of renewables in power supply is increasing fast and energy consumption has fallen. In our base case we see gas prices staying higher than before the energy crisis. But even in a negative scenario we do not expect prices to return to the peak of last years’ crisis.
EUR rates: US spill-overs, though the Euro area is a different story (Nordea) - EUR rates have seen spill-overs, but the situation is different as duration will be less of an issue and key figures remain weak. USD real rates are moving higher while EUR real rates are moving sideways.
Dutch retail sales volumes expected to shrink for the first time in a decade (ING) - Retail sales volumes in the Netherlands are expected to contract by 2% in 2023 for the first time in a decade. In addition to higher wages and purchasing costs, staff shortages are limiting growth for many retailers. Retail bankruptcies are expected to increase in 2023, especially in the more cyclical non-food segment.
Asia
The Bank of Korea’s hawkish pause continued on the back of inflation concerns (ING) - The Bank of Korea unanimously decided to leave its policy rate at 3.5%, extending its no-change action for five consecutive meetings. Meanwhile, the BoK maintained its forecasts for 2023 GDP and CPI while raising that of core CPI in its latest economic outlook.
Bank Indonesia keeps rates steady again to ensure FX stability (ING) - Bank Indonesia has kept rates at 5.75% as expected, despite moderating inflation.
Real Estate
Missing Middle Construction Weakens (NAHB) - The missing middle construction sector includes development of medium-density housing, such as townhouses, duplexes and other small multifamily properties. The multifamily segment of the missing middle (apartments in 2- to 4-unit properties) has disappointed since the Great Recession.
Research
High-Yield Debt Covenants and Their Real Effects (Dallas Fed) - High-yield debt, including leveraged loans, features incurrence financial covenants or "cov-lite" provisions. These covenants differ from traditional loans' maintenance covenants, as they preserve equity control rights but impose specific restrictions on the borrower after crossing the covenant threshold. Contrary to the prevailing belief that incurrence covenants offer limited protection for creditors, our research reveals a significant and sudden decline in investment upon triggering these covenants.
Policy impact of unexpected Fed rate movements blurred by key information cues (Dallas Fed) - Unexpected Federal Reserve monetary policy moves can profoundly affect market participants, investors and the economy. The impact of policy stems not only from its direct effects—the traditional focus for economists—but also from the new information revealed about the Fed’s economic outlook.
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