Core capital goods orders doubled the consensus forecast while total durable goods orders were flat, handing the Fed's hawks a stronger investment signal than the headline suggests.
The number most people saw from Friday's durable goods report was zero. The number that bears on the Federal Reserve's debate was 1.6%.
New orders for nondefense capital goods excluding aircraft, the category economists use as a proxy for business equipment spending, rose 1.6% in August to $87.6 billion, the Commerce Department's Census Bureau said. Economists had expected an increase of about 0.8%. Total durable goods orders, by contrast, were virtually unchanged at $338.6 billion, held down by a 0.6% drop in transportation equipment. Excluding transportation, orders rose 0.3%.
Orders and shipments
Orders describe what companies intend to buy. Shipments describe what was actually delivered, and they are the series that feeds directly into gross domestic product. There, the picture was more modest. Shipments of core capital goods rose 0.6% to about $85 billion. Shipments of all durable goods fell 0.2%, ending a run of eight straight monthly increases.
Backlogs kept building. Unfilled orders for durable goods rose 0.6% to $1.61 trillion, the 25th increase in 26 months. Defense spending is part of that story. Shipments of defense capital goods are up 28.5% so far this year.
The Atlanta Fed's GDPNow model, updated after the release, trimmed its estimate of third-quarter growth to 5.0% from 5.1%. Its estimate for private investment fell to 18.7% from 19.2%, even as its consumer spending estimate rose. The model is an estimate built from incoming data, not an official figure, but it shows the equipment beat did not translate into a stronger investment reading for the quarter already under way.
Two readings for policy
The report lands in the middle of an active debate at the Fed, which raised its benchmark range to 3.75% to 4% on Sept. 16. Futures markets price roughly a two-in-three chance of another quarter-point increase at the Oct. 27-28 meeting.
One reading is that companies ordering equipment at double the expected pace confirms an investment cycle, driven in part by artificial intelligence and defense, that is strong enough to justify further tightening. The other is that orders are measured in nominal dollars, so higher equipment prices inflate them, while the real-economy signals in the same report, a modest rise in core shipments and a break in the durable shipments streak, point to slower momentum than the orders line implies.
Treasury yields rose through the session, with the 10-year near 5.2%, but the day also brought a consumer sentiment report and continued pressure on long-dated bonds globally, so the move cannot be pinned on this release.
The Census Bureau's full factory orders report on Oct. 2 will revise the capital goods figures. If the 1.6% holds and core shipments start to follow, the investment case for another hike gets stronger. If orders are revised down or shipments stall, the gap between the two series becomes the more telling signal.