Durable Goods Shipments & Orders Drop
July 26, 2001
U.S. manufacturers reported a 2% drop in durable goods shipments in June together with a larger 2.3% dip in orders and 0.7% cut in inventories. This news is neutral to slightly negative for freight.
While the declines were lower than expected, this data is notoriously volatile, so one month does not set a trend.
Almost all of the decline was in three industries – motor vehicles, computers and communications equipment. Only communications equipment is on a steep downtrend that will continue for the rest of the year. Non-durable goods shipments – to be reported next week – are more important for freight. A small gain is expected on top of the 1.9% boost last month.
Presumably, manufacturers are trying to reach the inventory level that they would be comfortable with at the current level of consumption – production plus inventory draw downs – of their products. If so, most durable goods industries have at least several more months of inventory cutting ahead. Plunging exports are now the principal restraint on manufacturing recovery. We have to wait a few months for Europe and Asia to rebalance their inventories before they can increase imports from the U.S. Four of our seven largest trading partners are now in a recession. This includes, Japan, Germany, Taiwan and Mexico.
The durable manufacturing data, which is measured in dollars, looks worse than it actually is because of plunging prices. For example, computer sales dropped 7% from May to June, but about half of the decline was lower prices. Also, the inventory surplus is less than it appears to be when prices are falling because inventories are reported at original purchase prices without any adjustment for LIFO (last in – first out) inventory accounting.