Durable Goods Orders Drop But Details Show Positives

MBA (5/29/2008 ) Velz, Orawin
New orders for manufactured durable goods declined by 0.5 percent in April following a 0.3 percent drop in March. Transportation equipment orders fell 7.9 percent, led by a 20.0 percent drop in aircraft orders. Motor vehicle orders, which account for more than half of transportation orders, fell 3.3 percent.
But excluding the volatile orders for transportation equipment, orders were up by 2.5 percent, the biggest increase since July 2007. Increases in new orders for electrical equipment, appliances and components and machinery were largely responsible for the increase in overall orders. Orders for electrical equipment jumped a record 27.8 percent, more than offsetting an 18.9 percent drop in March.

Shipments for nondefense capital goods excluding aircraft—a component used in the calculation of economic growth in the current quarter—rose by 0.5 percent. Nondefense capital goods orders excluding aircraft—a proxy for future business investment in equipment and software—jumped 4.2 percent, the first increase this year. The strong increase bodes well for third quarter economic growth. In the face of declining domestic demand, manufacturers have benefited from overseas demand, boosted by global economic growth and the declining dollar.

Treasuries dropped and stocks rallied after the report of stronger-than-expected durable goods orders. Stocks later retreated over concern that regional banks, including KeyCorp, Ohio's third-largest bank, Marshall & Ilsley, Wisconsin's biggest bank and Regions Financial Corp., Alabama’s largest bank, face more writedowns.

The yield on 10-year Treasury notes rose by nine basis points and hovered around 4.00 percent mid-Wednesday afternoon, the highest level this year. Fed funds futures indicated a 70 percent probability that the Federal Reserve will increase its target rate by 25 basis points in December. The Fed is widely expected to keep the fed funds rate at 2 percent at the next meeting on June 24-25.