Merk Investments: Durable Goods
The durable goods series for the month of May arrived flat and the core ex-transportation number fell -0.9% vs. a revised -1.0% decline in April. Ex-defense orders of durable goods sank -0.6%, while orders for capital goods advanced 1.5% for the month and purchases by the Department of Defense jumped 10.9%. Orders for transportation goods increased 2.6% fueled by a 10.3% increase in orders for civilian aircraft and a 2.0% increase in demand for computers.
Outside of the orders for Boeing and an increase in orders for defense, the goods series signaled that there is trouble brewing in the second half of the year. Shipments of non-defense capital goods, ex aircraft that feeds into the current quarter GDP increased 0.6% for the month and advanced 2.2% on a three-month average. This will result in a slight increase in our current GDP forecast for the quarter from 1.7% to 1.8%. However, looking forward the key indicator of capital investment, orders for capital goods non-defense, ex-aircraft fell -0.8% month over month and declined -0.4% on a three month annualized average. Roughly translated, orders for equipment and software for Q3’08 are not looking quite good at this time. Once one begins to factor in the now expected downturn in production in Detroit in Q3 and Q4 we could be in for very tough sledding in the second half of the year. At this time the economy is running to stand still and there is a risk that the demand from the external sector, which has been critical to keeping the economy afloat, may begin to ebb.
Joseph Brusuelas
Merk Investments
Chief Economist/VP Global Strategy
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