New Orders for Durable Goods fell 2.5% in October. That was much worse than the consensus expectations for an increase of 1.5%.
However, the bad news can be pegged on the extremely volatile Transportation Equipment side, and more specifically, from the Non-Defense Aircraft component, which is often the case when we get a bad headline durable goods number. That is mostly orders for big 777's and 747's from Boeing (BA), which are very expensive items. It also includes orders for business jets from firms like Textron (TXT).
A few orders for new jumbo jets can really skew the numbers for the month. Excluding transportation equipment, new orders rose 0.5%, just slightly below expectations for a 0.6% increase. Overall transportation equipment orders were down 12.8%, and more specifically, non-defense aircraft orders dropped a stunning 99.5%. It just can't get much worse than that.
The non-defense aircraft numbers are beyond volatile. The December drop to almost nothing came on the heels of a 59.6% drop in November. Despite the back-to-back collapses, new orders for all of 2010 were 65.9% higher than for all of 2009.
If one wanted to gauge how much demand for long lasting goods is coming from the private sector, then one needs to strip out orders from the Pentagon. Excluding Defense, orders for capital goods were down 2.5% in December, after falling 1.0% in November.
While this month's numbers are extremely disappointing, there is a silver lining. Last month's numbers were revised sharply higher. Total new orders had been thought to have fallen by 0.3% in November, but that was revised to a decline of 0.1%. Orders ex-transportation equipment were actually up 4.5% in November rather than up 3.6%, as had been previously reported. Still, the headline number is now down for three months in a row, and that is hard to see as good news.
A Longer-Term View
Even if one strips out the most volatile sectors, like transportation equipment, durable goods orders can move around a lot from month to month. It is worth taking a step back and look at the longer term picture. If you look at total new orders for all of 2010 relative to the total new orders in 2009, things still look pretty good. Total new orders were 13.6% higher than last year, and if transportation equipment is stripped out, orders are up 13.8%.
Excluding Defense, full year orders are up 15.6%. In other words, we had a very robust recovery in orders early in the year, but that momentum is fading. It is important to keep in mind just how weak the economy was in the first ten months of 2009. The yearly gains say as much about the conditions last year, as they do about current conditions. It would be a big mistake to think that the yearly numbers represented some sort of normal growth rate, or that they will be repeated in 2011.
One of the areas that this is most apparent in is in what is known as “core capital goods.” Those are orders for non-defense capital goods, excluding aircraft. That is a very good proxy for what businesses are investing in equipment and software. That investment is a direct input into the GDP growth calculations, and one of the real bright spots for the economy in the first half of the year.
That is the sort of spending that is a bet on the economic future of the country, and is also one of the areas that trends to swing with overall economic conditions. Those swings are a big factor in determining if the economy is growing or shrinking.
On that front, the news in December was much more encouraging than the headline number would suggest. Core capital goods orders rose by 1.4%, on top an increase of 3.1% in November. The full year looks pretty good, with orders running 16.8% above the 2009 pace.
Other Factors
While the total stoppage of non-defense aircraft is the biggest sector story in this report by a very wide margin, it is not the only one of note. While a total lack of orders for the month can hardly be good news not only for the big names like Boeing and the big-name suppliers like United Technologies (UTX) and Honeywell (HON), but eventually it is bad news for thousands of much smaller sub-contractors, as well.
On the other hand, the existing book of business should keep them busy for awhile and history does suggest that we will see some big increases in non-defense aircraft soon. The Aerospace industry did not get a lot of help this month from the Defense side, either. Orders for defense aircraft fell by 10.9% in December, more than reversing a 7.3% rise in November, and on the heels of a 24.4% decline in October. For all of 2010, Pentagon aircraft orders were up just 0.9%.
If the country is going to make any progress on bringing down the deficit, Defense spending cuts are going to have to be on the table, and that probably means very little growth in spending on new planes and helicopters.
Orders for computers (and related gear) fell 11.2% on the month, but that is after a 7.3% rise in November, and for the full year they were up an impressive (although from a depressed base) 16.8% for all of 2010. Orders for communications equipment, on the the hand showed the opposite patter, up 3.6% in December on top of an 11.1% rise in November, but for the full year were 6.0% lower than in 2009.
There were some other bright spots in the report as well, most notably orders for Machinery, which rose 10.6% on the month, on top of a 0.3% rise in November and are up 21.6% for the full year. That strength was reflected today in the very strong earnings report of Caterpillar (CAT), the biggest U.S. machinery firm.
In Summation
Overall this was an ugly report, but once you dig a bit deeper, it was not quite as bad as it first appears. The upward revision to the November numbers takes just a little bit of the edge off of the bad news. Clearly we are not going to see another 99.5% fall in non-defense aircraft orders next month, and even if we did, they would not affect the overall number anymore.
With the stimulus wearing off and state and local government forced to cut spending sharply (or raise taxes) to balance their budgets the economy there is not a lot of fuel to spark a robust recovery. Consumers are still trying to deleverage their balance sheets by paying down debt and building up their savings. After trillions upon trillions of their wealth vaporized in the collapse of the housing market they have no choice but to do so.
Housing construction is normally a major positive force in pulling us out of recessions, but is totally missing in action this time around. While the full numbers still look great, that is not going to be repeated, or even come close in 2011 if we have more monthly numbers like this.
Businesses still have plenty of excess capacity so the only reason to invest is in areas that cut costs, not in areas that expand capacity. Cutting costs usually means substituting capital for labor. That helps raise productivity, but is not particularly helpful in reducing unemployment.
Very low interest rates and immediate expensing do help spur investment, but regardless of how little it costs to borrow, or the ability to quickly write off the investment on their taxes, no business is going to want to invest in capacity that is just going to sit idle from lack of demand.
BOEING CO (BA): Free Stock Analysis Report
CATERPILLAR INC (CAT): Free Stock Analysis Report
HONEYWELL INTL (HON): Free Stock Analysis Report
TEXTRON INC (TXT): Free Stock Analysis Report
UTD TECHS CORP (UTX): Free Stock Analysis Report
Zacks Investment Research
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A few orders for new jumbo jets can really skew the numbers for the month. Excluding transportation equipment, new orders rose 0.5%, just slightly below expectations for a 0.6% increase. Overall transportation equipment orders were down 12.8%, and more specifically, non-defense aircraft orders dropped a stunning 99.5%. It just can't get much worse than that.
The non-defense aircraft numbers are beyond volatile. The December drop to almost nothing came on the heels of a 59.6% drop in November. Despite the back-to-back collapses, new orders for all of 2010 were 65.9% higher than for all of 2009.
If one wanted to gauge how much demand for long lasting goods is coming from the private sector, then one needs to strip out orders from the Pentagon. Excluding Defense, orders for capital goods were down 2.5% in December, after falling 1.0% in November.
While this month's numbers are extremely disappointing, there is a silver lining. Last month's numbers were revised sharply higher. Total new orders had been thought to have fallen by 0.3% in November, but that was revised to a decline of 0.1%. Orders ex-transportation equipment were actually up 4.5% in November rather than up 3.6%, as had been previously reported. Still, the headline number is now down for three months in a row, and that is hard to see as good news.
A Longer-Term View
Even if one strips out the most volatile sectors, like transportation equipment, durable goods orders can move around a lot from month to month. It is worth taking a step back and look at the longer term picture. If you look at total new orders for all of 2010 relative to the total new orders in 2009, things still look pretty good. Total new orders were 13.6% higher than last year, and if transportation equipment is stripped out, orders are up 13.8%.
Excluding Defense, full year orders are up 15.6%. In other words, we had a very robust recovery in orders early in the year, but that momentum is fading. It is important to keep in mind just how weak the economy was in the first ten months of 2009. The yearly gains say as much about the conditions last year, as they do about current conditions. It would be a big mistake to think that the yearly numbers represented some sort of normal growth rate, or that they will be repeated in 2011.
One of the areas that this is most apparent in is in what is known as “core capital goods.” Those are orders for non-defense capital goods, excluding aircraft. That is a very good proxy for what businesses are investing in equipment and software. That investment is a direct input into the GDP growth calculations, and one of the real bright spots for the economy in the first half of the year.
That is the sort of spending that is a bet on the economic future of the country, and is also one of the areas that trends to swing with overall economic conditions. Those swings are a big factor in determining if the economy is growing or shrinking.
On that front, the news in December was much more encouraging than the headline number would suggest. Core capital goods orders rose by 1.4%, on top an increase of 3.1% in November. The full year looks pretty good, with orders running 16.8% above the 2009 pace.
Other Factors
While the total stoppage of non-defense aircraft is the biggest sector story in this report by a very wide margin, it is not the only one of note. While a total lack of orders for the month can hardly be good news not only for the big names like Boeing and the big-name suppliers like United Technologies (UTX) and Honeywell (HON), but eventually it is bad news for thousands of much smaller sub-contractors, as well.
On the other hand, the existing book of business should keep them busy for awhile and history does suggest that we will see some big increases in non-defense aircraft soon. The Aerospace industry did not get a lot of help this month from the Defense side, either. Orders for defense aircraft fell by 10.9% in December, more than reversing a 7.3% rise in November, and on the heels of a 24.4% decline in October. For all of 2010, Pentagon aircraft orders were up just 0.9%.
If the country is going to make any progress on bringing down the deficit, Defense spending cuts are going to have to be on the table, and that probably means very little growth in spending on new planes and helicopters.
Orders for computers (and related gear) fell 11.2% on the month, but that is after a 7.3% rise in November, and for the full year they were up an impressive (although from a depressed base) 16.8% for all of 2010. Orders for communications equipment, on the the hand showed the opposite patter, up 3.6% in December on top of an 11.1% rise in November, but for the full year were 6.0% lower than in 2009.
There were some other bright spots in the report as well, most notably orders for Machinery, which rose 10.6% on the month, on top of a 0.3% rise in November and are up 21.6% for the full year. That strength was reflected today in the very strong earnings report of Caterpillar (CAT), the biggest U.S. machinery firm.
In Summation
Overall this was an ugly report, but once you dig a bit deeper, it was not quite as bad as it first appears. The upward revision to the November numbers takes just a little bit of the edge off of the bad news. Clearly we are not going to see another 99.5% fall in non-defense aircraft orders next month, and even if we did, they would not affect the overall number anymore.
With the stimulus wearing off and state and local government forced to cut spending sharply (or raise taxes) to balance their budgets the economy there is not a lot of fuel to spark a robust recovery. Consumers are still trying to deleverage their balance sheets by paying down debt and building up their savings. After trillions upon trillions of their wealth vaporized in the collapse of the housing market they have no choice but to do so.
Housing construction is normally a major positive force in pulling us out of recessions, but is totally missing in action this time around. While the full numbers still look great, that is not going to be repeated, or even come close in 2011 if we have more monthly numbers like this.
Businesses still have plenty of excess capacity so the only reason to invest is in areas that cut costs, not in areas that expand capacity. Cutting costs usually means substituting capital for labor. That helps raise productivity, but is not particularly helpful in reducing unemployment.
Very low interest rates and immediate expensing do help spur investment, but regardless of how little it costs to borrow, or the ability to quickly write off the investment on their taxes, no business is going to want to invest in capacity that is just going to sit idle from lack of demand.
BOEING CO (BA): Free Stock Analysis Report
CATERPILLAR INC (CAT): Free Stock Analysis Report
HONEYWELL INTL (HON): Free Stock Analysis Report
TEXTRON INC (TXT): Free Stock Analysis Report
UTD TECHS CORP (UTX): Free Stock Analysis Report
Zacks Investment Research
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