Implications: A Plow Horse report for durables goods orders in June. The good news was that new orders for durable goods increased 0.7% in June and 0.8% excluding transportation, both narrowly beating consensus expectations. The bad news: orders for most major categories of durable goods have been growing more slowly in the past few months. So, despite strong profits and cash on the balance sheet, many companies are still waiting to ramp up business investment. In addition, shipments of "core" capital goods, which exclude defense and aircraft – a good proxy for business equipment investment – declined 1% in June. However, core shipments were still up at a 4.1% annual rate in the second quarter and our models suggest that businesses increased "real" (inflation-adjusted) equipment investment at about a 9% annual rate in Q2. As the broader economy continues to grow, look for orders to pick up some steam. Signaling future gains, unfilled orders for "core" capital goods rose 1.2% in June, hitting a new record high, and are up 8.9% from a year ago. We believe we are nearing a large increase in business investment over the next couple of years. Consumer purchasing power is growing and debt ratios are low, leaving room for an upswing in bigger ticket items. Meanwhile, profit margins are still high, corporate balance sheets are loaded with cash, and capacity utilization is near long-term norms, leaving more room (and need) for business investment. Plugging all of this week's data into our models suggests real GDP grew at a 2.7% annual rate in Q2. That's slightly lower than we were estimating a week ago (2.9%) but well within the normal range for a Plow Horse economy.
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Posted on Friday, July 25, 2014 @ 11:00 AM