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Durable goods orders continue to improve, led by aircraft orders

Factory orders for durable goods rose in August, driven by a large increase in commercial aircraft orders. Excluding aircraft, orders actually rose by a modest 0.1%, but year-over-year growth remains strong in the 3rd quarter. Orders historically are a leading indicator of future shipments, and August’s results suggest that freight demand on the durable side of the manufacturing sector should remain solid, even if it slows from earlier in the year. 

Advance readings from the Census Bureau show that orders placed for durable goods in the economy rose a healthy 4.5% in August from July’s levels. This beats consensus estimates for a 2.2% and marks a nice rebound from last month’s 1.2% decline. Current orders for durable goods 11.8% higher than at this point last year.

 Growth in orders has moderated but remains high
Growth in orders has moderated but remains high

The wild swings over the past couple of months have been driven by the often-volatile transportation sector. New orders for commercial airlines rose 69.1% in August after a 29% decline in the previous month to help boost the overall numbers. Excluding the transportation portion, durable goods orders barely eked out a 0.1% increase in August, below consensus estimates of 0.2%. Year-over-year growth excluding transportation remains strong, however, registering 7.3% in August. This is down from some of the strength in orders seen earlier this year, but still high from a historical perspective

 Historically, orders lead shipments by 1-2 months
Historically, orders lead shipments by 1-2 months

Historically, durable goods orders provide some forward-looking insight into the state of the durable manufacturing sector, as orders that are placed in the current month become production and shipments in upcoming months. New durable goods have a tight correlation with the durable goods shipments in the economy, typically leading shipments by a couple of months. These shipments historically have had close ties to manufacturing of durable goods in the economy.

Because of this, the state of new orders for durable goods gives valuable insight into the upcoming state of freight demand. Domestic manufacturing helps provide the foundation for freight demand in the economy, as goods that are produced here either travel throughout the domestic supply chain to their end destination, or make their way to ports to be exported to the rest of the world.  As such, August results would point to a demand environment that is moderating, but remains solid.

Behind the numbers

Aircraft orders have produced some eye-popping headline numbers over the past couple of months, but the underlying trend on the durable side of the economy has shown some gradual moderation from the highs seen in April of this year. This is consistent with our view that the economy will be slowing some after an impressive 2nd quarter. Still, the pace of growth looks healthy, which would suggest the freight demand of durable goods will be solid going forward. The tie been orders and future shipments is very tight historically    

It is worth noting, however, that the results from this morning give no insight into the nondurable side of the economy. Nondurable manufacturing showed some real weakness in August, but we will have to wait until the full manufacturing orders report early next month for insight into whether this trend will continue. Also, like many other indicators in the economy, year-over-year growth trends may begin to moderate in upcoming months if for no other reason than the fact that comparisons to last year will become tougher as we get to the end of the year.

Ibrahiim Bayaan is FreightWaves’ Chief Economist. He writes regularly on all aspects of the economy and provides context with original research and analytics on freight market trends. Never miss his commentary by subscribing.