By Northern Trust

Orders of durable goods fell 1.0% in June following a revised 0.8% decline in May. These numbers are partly distorted by the large swings in bookings of aircraft orders, which have dropped 30.2% and 25.6%, respectively, in May and June.  The large reductions of aircraft orders are expected to be reversed in July.  Total orders advanced in the December-April months and they have risen year-to-year for a stretch of six straight months but the pace of gains has slowed (see chart 1).  On a quarterly basis, orders of all durable goods moved up at an annual rate of 9.3% vs. a 25.5% jump in the first quarter. 

Shipments of durable goods fell in May and June but they have risen on a quarterly basis.  In June, orders (+0.6%) and shipments (+0.2%) of non-defense capital goods excluding aircraft advanced.  In the second quarter inflation adjusted shipments of non-defense capital goods excluding aircraft, the input for equipment and software spending in the GDP report, rose at an annual rate 14.5% vs. a 10.7% increase in the first quarter.  The large increase points to a significant contribution of equipment and software spending to real GDP in the second quarter; the report is scheduled for publication on July 30.  In the first quarter, real equipment and software spending rose at an annual rate of 11.4%.

From the details of the report, in June, orders of electrical equipment (+3.7%), communications (+1.5%), and motor vehicles (+2.5%) advanced while that of primary metals (-2.0%), general machinery (-0.7%), and computers and electronic products (-1.9%).

Update on Inflation Expectations

In the inflation/deflation debate, deflation has taken the upper hand following the three consecutive monthly declines of the Consumer Price Index (CPI).  Consistent with the decelerating trend of year-to-year changes in the overall CPI and the core CPI, inflation expectations also show a downward trend (see chart 3).  Inflation expectations, as measured by the difference between the nominal yield on 10-year Treasury securities and the 10-year TIP rate, have declined to 182 bps from a recent high of 245 bps on April 29 (see chart 4).  In the past week, inflation expectations have gained a few basis points but the reversal of trend is still noteworthy.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.