An indicator of business spending surged in July despite a big drop in total factory orders, according to final numbers released Tuesday by the Commerce Department.
Orders for non-defense capital goods minus aircraft increased 1% from the month before, better than the originally reported 0.4% increase, and June’s 0.1% hike. This measure, which serves as a proxy of business investment, pushed the three-month annualized rate to a steady 5.1% gain.
Shipments of non-defense capital goods minus aircraft, which go into federal gross domestic product calculations, moved 1.2% higher in July, 0.2 of a percentage point better than the preliminary number. This pushed the annual growth rate to 5.4%, and according to analysts at Wells Fargo Securities, is consistent with its forecast for gradual firming in equipment investment in the third quarter of the year.
These positive numbers came as total new orders for manufactured goods in July plummeted by 3.3%, the biggest decline in nearly three years, erasing an upwardly revised June improvement of 3.2%. Much of this was due to a 19.2% drop in transportation orders, especially the volatile aircraft sector, while those for autos fell 0.9%. Excluding transportation, new orders were up 0.5%, the best month since January.
In contrast, shipments of manufactured goods increased 0.3% in July from the month before, recording the seventh gain in the past eight months.
There's really only good news in the July factory orders report where the headline reflects a slowing in what were strong prior gains for aircraft orders, according to analysts at Econoday. It said the best news is the upward revision to core capital goods orders (nondefense minus aircraft), plus the upward revision to core shipments.
“These numbers point to accelerating strength for third-quarter business investment,” Econoday said.
When it comes to the outlook for overall new factory orders, some analysts are also bullish on the auto sector because they are anticipating a spike in demand as residents in storm-ravaged Texas replace flood-damaged vehicles. Some estimates place the number of damaged cars and light-trucks as high as 1 million vehicles in the wake of Hurricane Harvey.