GDP revised lower in Q2 while durable goods tumble


The data this morning was weak, on balance. GDP growth was revised down to 1.3% in Q2 from 1.7% while durable goods orders tumbled 13.2%. In addition, pending home sales declined 2.4% MoM in August. Providing some positive offset, jobless claims were better than expected and the preliminary benchmark payroll revision revealed an additional 386,000 jobs.

durable goods orders in august worst in 22 years

Initial claims for unemployment insurance fell a greater-than-expected 26,000 to 359,000 in the week ending September 22. The four-week average declined for the first time in six weeks to 374,000. More sustained declines would need to be seen to suggest improvement. The four-week average points to continued modest employment gains trending near 125,000.

BLS announced a preliminary upward revision of 386,000 to the level of establishment employment in March 2012 (non-farm payrolls). Such an upward revision (0.3% in level) is not surprising in recoveries.

 Q2 GDP revision:

Q2 GDP was revised down to 1.3% from 1.7% owing to small tweaks in consumer spending, residential investment, structures
investment, inventories and trade. This left real domestic demand to slip to 1.4% from 1.6%. In the prior three quarters, final sales averaged just above 2.0%, highlighting the slowdown in underlying momentum.

Headline durable goods

Total durable goods orders plunged 13.2% in August, significantly below expectations of a 5.0% drop. The sharp decline was due to aircraft orders, which fell 102%, more than reversing the 51% gain the prior month. Elsewhere, defense spending fell 40%, also showing
weakness in a volatile fashion.

Morgan Stanley research notes that capital equipment and other durable goods demand continues to see a pronounced negative impact from fiscal cliff uncertainty, inflecting lower last summer after the debt ceiling fight and seeing accelerating weakness this year. Overall durable goods orders collapsed 13.2% in August, a pace of decline only exceeded twice in the 22 years of data, in January 2009 and June 2000 (when the1990’s tech bubble popped).

The majority of this weakness reflected a plunge in civilian aircraft orders, which were actually negative as cancellations exceeded new orders. Ex aircraft orders fell 5.1%, with most major categories declining. Nondefense capital goods ex aircraft orders did rebound 1.1%, but this followed a downwardly revised 7.8% decline the prior two months, and the trend for capital equipment demand moving towards year end still looks dismal. Capital goods shipments fell in August, pointing to a decline in business investment in Q3. Durable goods inventories jumped more, some analysts increased their Q3 forecasts. More than half of the expected growth in Q3 now comes from inventories, and risks of an inventory correction in Q4 are growing.

To answer the obvious quandary of how the job numbers were so good, yet the durable goods numbers were so poor, the answer might be that the Durable goods inventories jumped, which should boost GDP in Q3. However, the question still remains as to why the divergence is so high.