Durable Goods Orders Plummet in August at Worst Rate Since Recession
New orders for durable goods dropped the most in August since the depths of the Great Recession. Businesses cut back spending on long-term, fixed assets. Companies had been increasing spending on durable goods for the previous three months but this month's report wipes out all of those gains.
The Census Bureau reported Thursday morning that new orders for durable goods dropped an astonishing 13.2 percent in August, the largest one month drop since January 2009. Non-defense new orders, a measure of private sector fixed investment, also posted a large drop. Non-defense orders fell 12.4 percent in August following a 4.7 percent gain in July. It is important to note that excluding transportation, which is largely made up of aircraft spending, new orders only fell 1.6 percent.
Some economists will point to the fact that a better barometer of fixed investment by corporations is likely to take out both defense spending and transportation spending, as both can be cyclical due to the nature of long-term contracts. This measure, non-defense capital goods orders excluding aircraft, actually rose 1.1 percent, higher than economist expectations of a gain of 0.5 percent.
The large drop in aircraft and defense orders should come as no surprise, as many orders may have been front-loaded in July due to the Farnsborough Air Show, where aircraft manufacturers usually sign lucrative contracts with both airlines and governments. This can be seen in the 13.1 percent increase in transportation new orders in July. Thus, the data may not be as bad as the headline number indicates.
Markets seemed to ignore the data, as it is largely backward-looking. Additionally, there remains rampant speculation that the Chinese government will soon unveil additional stimulus. As the data is from July, investors may believe that QE3 could entice companies to begin spending again on long-term assets.
The S&P 500 gained 5.86 points, or 0.41 percent, to 1,439.18, breaking five straight days of losses and the VIX, the fear gauge in the market, fell 3.75 percent to 16.18. WTI Crude also gained on the news, rising 1.26 percent to $91.11 per barrel, and gold rallied 0.71 percent to $1,763.10 per ounce.
The dollar weakened on the data, as investors believe that the weak data points to an extended period of QE3, as the Fed has not stated a timetable for its purchases, leaving some to deem the program QEinfinity. The dollar index fell 0.13 percent as Great Britain's pound, the Japanese yen, and the Swedish krone all gained against the dollar. The euro did slip against the dollar on Spanish fears, sliding 0.05 percent to 1.2864 but was off the lows of the session.
Alongside the durable goods report, the Bureau of Economic Analysis released the final revision for second quarter GDP which showed that the economy expanded a mere 1.3 percent in the second quarter, well below the previous estimate and economists estimate of 1.7 percent growth. All of the data only further supports the Fed's new policy actions and further stimulus from other nations such as China and Japan will surely help to bolster the slowing global economy.
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