At first glance, May's 1.1% drop in durable goods orders -- the indicator's first decline in six months -- appears to be a decidedly downbeat report. However, digging a little deeper reveals somewhat less negative news.
Exclude the often-volatile transportation component, and May durable goods orders rose 0.9% in May. In addition, the ex-transportation, three-month moving average for durable goods is still at a strong 1.6% -- more than enough to confirm an ongoing expansion in the U.S.'s core industrial sector.
Also, April's durable goods orders were revised higher to a 3% gain from the previously released 2.8% rise. April's ex-transportation component was also revised to an 0.8% decline, an improvement from the 1% decline released earlier.
A Big Reversal in Manufacturing Orders
The effect of a slide in transportation orders on the top-line durable goods statistic for May is clear: Transportation orders plunged 6.9% in the month after surging 15.4% in April.
Surveying other sectors, machinery orders jumped 5.6%, computers rose 2.5%, primary metals increased 0.8% and electronic products (excluding computers) rose 0.1%. On the negative side, fabricated metal products declined 1.2%, capital goods fell 2.8% and communications equipment plummeted 9.4%.
Durable goods orders are new orders by stores and businesses for immediate and future delivery of factory hard goods. These orders measure how busy factories are likely to be in the immediate months ahead for such items as refrigerators, washers and dryers, cars, computers and industrial machinery.
An Ongoing Expansion, but It Will Be Tested
Investors should follow the statistic because rising durable goods orders usually indicate that businesses are experiencing sustainable demand, which usually translates into higher revenue and increased production by the manufacturing sector -- two bullish signs for the U.S. stock market.
In short, despite the decline in durable goods orders in May, the ex-transportation component's 0.9% rise, combined with other, bullish manufacturing indicators, such as the Institute for Supply Management's Manufacturing Index, confirm an ongoing manufacturing expansion that's leading the U.S. economic recovery.
Even so, the key months for the expansion are still ahead: That's because the growth generators of fiscal stimulus and inventory rebuilding will decrease in impact and continual, monthly gains in employment will be needed to advance the recovery to a self-sustaining expansion.
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