Total durables orders jumped a whopping 11.2% in July, with a large 1.1% upward revision to the June estimate.
The Census Bureau released estimates of July activity in durable goods manufacturing on August 26. These estimates indicated that the sector continued to recover from the COVID shutdown in July. Total durables orders jumped a whopping 11.2% in July, with a large 1.1% upward revision to the June estimate.
True, the size of this decline was boosted by large “increases” in orders for aircraft and vehicles. Still, even net of transportation equipment, durables orders rose a nice 2.4% in July on top of a 0.4% revision to June. Those gains left July non-transportation durables just 1% below their pre-COVID February levels, after this metric had been down 10% from February levels through April.
An important metric within durables orders is orders for capital goods other than aircraft. These orders rose 1.9% in July on top of a 0.8% upward revision to June. This metric through July stood just 0.5% below February levels, after having been down 7.8% from February through April. As you can see in the chart (blue line), basic CAPEX orders have rebounded steadily and sharply over the last three months.
Exhibit 1: Orders for Nondefense Capital Goods
Source: Census Bureau. As of 31 Jul 20.
That 0.5% by which they fall short of February levels is within the margin for measurement error for this series, and generally, the July level looks on par with prevailing levels of the last 18 months. Six months ago, we were lamenting that CAPEX orders had failed to sustain any increases in late 2018 and 2019. Presently, we are relieved by the fact that they have recouped essentially all their COVID-related declines.
Now, the recovery in durables in general and in CAPEX in particular is not uniform across sectors. High-tech sectors are well above February activity levels, while low-tech are still noticeably below, but both have bounced nicely in recent months.
Meanwhile, we put quotation marks around “increases” with regard to aircraft orders, because the July levels were still substantially negative, just not so much as in June (green line in chart). Negative orders means that aircraft buyers are still cancelling past orders faster than they are completing new ones. Clearly, the troubles in aircraft reflect troubles in those service sectors suffering the ravages of social distancing and anti-COVID protocols (as well as the almost-forgotten 737 MAX issues).
As we’ve said repeatedly, ongoing strictures on travel, accommodations, entertainment, and food services will prevent the recovery from becoming complete across the economy. However, in the sectors not harshly affected by remaining shutdowns/fears, recovery has been dramatic and, in most cases, complete. For these latter sectors, more government stimulus isn’t needed. For the former, still-ravaged sectors, further government stimulus won’t help.
Capital expenditures (Capex) represent the amount spent by a company to acquire or upgrade productive assets (such as buildings, machinery and equipment, vehicles) in order to increase the capacity or efficiency of a company for more than one accounting period.
Durable goods (“durables”) are products that are tend to be purchased infrequently such as furniture, cars, and major appliances.
737 Max refers to a type of airliner manufactured by Boeing.
Find out more about Western Asset's Fixed Income solutions:
Legg Mason Western Asset Australian Bond Fund
Legg Mason Western Asset Conservative Income Fund
Legg Mason Western Asset Global Bond Fund
Legg Mason Western Asset Macro Opportunities Bond Fund
Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.
All investments involve risk, including possible loss of principal.
The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested.
Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice. Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).
This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc. Unless otherwise noted the "$" (dollar sign) represents U.S. Dollars.
This material is only for distribution in those countries and to those recipients listed.
All investors and eligible counterparties in EU and EEA countries:
In Europe (excluding UK and Switzerland), this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office Floor 6, Building Three, Number One, Ballsbridge, 126 Pembroke Road, Ballsbridge, Dublin 4. D04 EP27, Ireland. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.
In the UK, this financial promotion is issued by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the UK Financial Conduct Authority.
In Switzerland, this financial promotion is issued by Legg Mason Investments (Switzerland) GmbH.
Investors in Switzerland: The representative in Switzerland is FIRST INDEPENDENT FUND SERVICES LTD., Klausstrasse 33, 8008 Zurich, Switzerland and the paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1, 8024 Zurich, Switzerland. Copies of the Articles of Association, the Prospectus, the Key Investor Information documents and the annual and semi-annual reports of the Company may be obtained free of charge from the representative in Switzerland.
All Investors in Hong Kong and Singapore:
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.
This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.
All Investors in the People’s Republic of China (“PRC”):
This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC. The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking Regulatory Commission. Investors should read the offering document prior to any subscription. Please seek advice from PRC’s commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only. Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.
This material has not been reviewed by any regulatory authority in the PRC.
Distributors and existing investors in Korea and Distributors in Taiwan:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (109) Jin Guan Tou Gu Xin Zi Di 016; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.
This material has not been reviewed by any regulatory authority in Korea or Taiwan.
All Investors in the Americas:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.
All Investors in Australia and New Zealand:
This document is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827). The information in this document is of a general nature only and is not intended to be, and is not, a complete or definitive statement of matters described in it. It has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person.
The aforementioned Legg Mason entities are wholly owned subsidiaries of Franklin Resources, Inc.