The durable goods report for August came in yesterday. The headline number looked very impressive at an increase of 4.5% when the expectation was for half that amount. This was the biggest increase since February. This is a case in which you do not give the headline number much weight. After you strip out plane and car orders the number only increased .1%.
A much more useful way to look at this report is concentrating on the core capital goods orders part of the overall release which ‘fell’ .5%. This follows four straight months of strong gains. It is only one month so there is not a lot we can conclude other than August was weak. Inventory is low so we may see some replenishment in the next couple of months and no one is sure what impact the tariffs have had on the number.
Core capital durable goods orders are an important factor in determining the health of corporate America and their spending on those things that are high priced and long lasting. The thinking is if CEOs slow or stop spending on capital goods they are seeing hard times ahead and want to preserve their cash position. It’s not a perfect relationship but it does exist. However, again one month does not make a trend.