US durable goods orders rise robustly in July, equipment investment to be flat for rest of this year

US durable goods orders grew strongly in July, beating consensus expectations. The growth was mainly driven by a rebound in non-core items. Durable goods orders rose robustly by 4.4 percent in sequential terms last month. Consensus expectations were for a rise of 3.4 percent.

The improvement in growth relative to the downward revision of June’s print was predominantly due to a rebound in non-core items, particularly non-defence and defence aircraft. But the 1.6 percent month-on-month increase in core capital goods orders also helped pull the headline print up.

Core capital goods orders and shipments are the two key factors to the BEA’s estimation of equipment investment in GDP, noted Barclays in a research report. Equipment investment is expected to be roughly flat for the rest of 2016, according to Barclays. The forecast faces an upside risk from the strength in orders.

“Consistently, we are currently tracking 1.2 percent for equipment investment growth in Q3, up from 0 percent in our initial forecast”, added Barclays.

Delving into details of July’s durable goods order report, all major categories rose strongly in sequential terms. Only motor vehicles and parts were an exception that came in flat after rising 2 percent in June.

On the contrary, core capital goods shipments dropped 0.4 percent month-on-month. This possibly reflects the drop in orders in the past several months. The current strength in orders is likely to translate into robust shipment growth in months ahead.

Manufacturers’ inventories of durable goods grew 0.3 percent in sequential terms, the first rise in several months. The upbeat reading on inventories might show that the inventory destocking that started in mid-2015 might have come to an end in the third quarter. Inventories are expected to contribute positively over the quarter as a whole.