This afternoon Fed chair Janet Yellen will be mindlessly yapping about things like uncertainty but also about the strengthening economy. Meanwhile, today’s durable goods report should give her something to think about.

The Bloomberg Econoday consensus estimate for durable goods orders was -1.3% in a range of -3.6% to +2.0%. Orders came in at -4.0% and last month was revised from -2.2% to -2.8%.

Highlights

Orders proved very weak for the factory sector for a second straight month in June, down 4.0 percent and outside Econoday’s low estimate. Core readings are also soft with ex-transportation also lower for a second month, down 0.5 percent, with core capital goods (nondefense ex-aircraft) higher but up by only 0.2 percent and following two straight prior declines of 0.5 and 0.9 percent.

Orders for civilian aircraft, which are always volatile month to month, fell nearly 60 percent in June, offsetting for the transportation group a solid 2.6 percent gain for vehicles. But vehicles are by far the best news in the report with nearly all other sectors posting declines and some sharp declines including computers, down 9.1 percent in the month, communications equipment at minus 2.3 percent, and primary metals down 1.3 percent.

Total unfilled orders are a very serious negative, down 0.9 percent following no change in May and suggesting that factories have been keeping production up by working off backlogs which is a negative for future employment. And factories did keep busy in the month as indicated by the previously released industrial production report and by a 0.4 percent gain for shipments in this report. A plus for employment is another draw in inventories, down 0.2 percent and taking the stock-to-sales ratio down to 1.64 from 1.65.

Year-on-year rates reinforce the sense of weakness. Total orders are down 6.4 percent which outside of an aircraft-distorted 19 percent decline in July last year is the weakest in 4 years. Ex-transportation orders are down a year-on-year 3.6 percent with core capital goods down 3.7 percent which, strikingly, is the 17th decline in 18 months — confirmation of weakness in both domestic and global business investment. Shipments of capital goods, which are inputs into the nonresidential fixed investment component of GDP, fell 0.4 percent in June which is a second straight decrease and will not be raising estimates for Friday’s second-quarter GDP report.

Anecdotal reports on the factory sector have been less negative than this report, which however is a definitive report. And the monthly headline decline in today’s report is the most severe since August 2014. The factory sector may not be coming be alive as hoped going into the second half of the year.

Recent History

Durable goods orders have been up and down and a 1.3 percent dip is expected for June following a 2.3 percent drop in May. Capital goods data have been a key weakness in this report, underscoring lack of business investment in new equipment. Always a wildcard in this report is commercial aircraft where orders have been showing some new life after contracting earlier in the year. Vehicle orders have been only slightly stronger. Ex-transportation durable orders are expected to make the plus column, at 0.3 percent.

Commercial Aircraft

Layoff announcements by Honeywell and Boeing should have knocked the idea that aircraft orders might show signs of life.

New orders are likely to remain weak given that existing orders are being cancelled.

For detail, please see …

Durable Goods Orders

Durable Goods 2016-07A

Manufacturing clearly remains in recession.

Mike “Mish” Shedlock