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Weekly Economic Commentary


Durable Goods Report Implies Lackluster 2012:Q2 Equipment and Software Spending

June 27, 2012

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Orders of durable goods rose 1.1% in May, after posting declines in each of the two prior months. The level of orders continues to hold below the recent peak registered in December 2011. Orders of machinery (+4.1%), computer equipment (+3.3%), motor vehicles (+0.5%), non-defense capital goods excluding aircraft (+1.6%), and civilian aircraft (+4.9%), and defense capital goods (+7.8%) moved up in May.

Chart 1 - 06 27 2012

Shipments of durable goods increased 0.7% in May, matching the performance of April. Drilling down to components, shipments of non-defense capital goods excluding aircraft (this component matters for the GDP report) rose 0.4% in May, reversing a part of the 1.5% drop recorded in April. Inflation adjusted shipments of durable goods excluding aircraft are used to estimate equipment and software spending in the GDP report. The April-May average of real shipments of durable goods excluding aircraft slipped slightly (-0.2%) compared with the tally of the first quarter. Unless there is a strong pickup in shipments of durable goods excluding aircraft in June, business sector spending in the second quarter should be soft. Equipment and software spending increased at annual rate of only 3.9% in the first quarter. In sum, the May durable goods report bodes poorly for second quarter real GDP growth.

Chart 2 - 06 27 2012

Pending Homes Sales Index Points to Likely Gain in Existing Home Sales

The Pending Home Sales Index (PHSI) of the National Association of Realtors increased 5.9% to 101.1 in May after a 5.5% decline in April. The PHSI provides information about contracts but not actual closings of existing home sales. The PHSI leads existing home sales by 1-2 months. The May level of the PHSI matches the mark reached in March 2012 and it is the highest since June 2007. Readings similar and higher than the May 2012 mark were attained in 2009 and 2012 when the first-time homebuyer credit was in place, which is not useful for comparisons because the PHSI was boosted by the temporary program. The PSHI rose in all four regions of the nation, with the South recording the smallest increase. Sales of existing homes have fallen in three out of the four months ended May. The May PHSI raises expectations of an increase in sales of existing homes in May.

Chart 3 - 06 27 2012












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.