Location: Toronto
Author: RBC Financial Group Economics Department
Date: Thursday, August 27, 2009
The July durable goods new orders report came in stronger than anticipated, rising 4.9% in the month. Expectations had been for a more moderate 3% rise. The positive aspect of the report was reinforced with the decline in June being halved to 1.3% from 2.5%.
Expectations of a strong rebound in July were largely premised on the expectation of a rebound in auto production. However, this component rose a relatively modest 0.9% in the month. The strength in the report was more a reflection of a huge 107.2% rise in non-defence aircraft and parts orders. This component can be very volatile month to month reflecting the “lumpy” nature of the sectors output. Thus, it is the case that the increase in July followed a 30% drop in June, although the sector did rise a robust 60.4% in May, suggesting an overall rising trend.
Excluding this component, there were largely offsetting movements in most other components. This contributed to non-defence capital goods new orders ex aircraft, a leading indicator of business investment, staying relatively flat, dropping a minimal 0.3%. Although the drop was disappointing, it failed to offset strong gains of 3.6% and 4.3% in June and May, respectively.
In terms of other components of the report, durable shipments rose 2% following a 0.7% gain in June. Inventories continue to be reduced, dropping 0.8% in July following declines of 1.5% and 1.2% in June and May, respectively.
The rebound in durable orders had been widely expected although more on the basis of indications of rising motor vehicle production as evident in the July industrial production report. Although orders for motor vehicles showed only modest strength in July, it is likely to become a more significant addition in subsequent months with the gap near-term being filled by rebounding aircraft orders. This expected pick-up in motor vehicle activity reflects the combination of various producers coming out of bankruptcy protection in the month and a strong rebound in demand for autos fuelled by the “cash-for-clunkers” program.
The rise in both supply and demand for motor vehicles is expected to be a key factor returning the overall GDP growth rate to the positive column in the third quarter. Our current monitoring of a 1.3% rise represents a marked improvement relative to declines of 1% and 6.4% in the second and first quarters, respectively. However, the expected gain in the third quarter is indicative of still-modest growth that will not be sufficient to prevent a continued rise in the unemployment rate. The persistence of weakness in labour markets will be a factor keeping monetary conditions accommodative, with the Fed expected to maintain the current low range in Fed funds of 0% to 0.25% through the end of this year and well into 2010.
Strong rise in U.S. new home sales pares inventories
Sales of new homes registered a strong increase in July, rising 9.6% to 433,000 annualized units from June’s 395,000 (revised up from 384,000). The percentage gain was the strongest since February of 2005 with the level of sales the highest since September of last year.
All regions posted gains except the Midwest. Sales gains in the Northeast were strongest, posting a 32.4% rise with the South showing a sales gain of 16.2%. New home sales in the West rose a more muted 1%, with the Midwest posting a 7.6% decline.
The rise in sales helped pare inventories. Months’ supply of unsold homes on the market declined to 7.5 from 8.5 (revised from 8.8) in June. This measure peaked at 12.4 in January, but as of July fell to its lowest level since April of 2007. In absolute terms, inventories of unsold homes were 271,000 in July following the 280,000 reading (revised from 281,000) registered in the prior month.
Today’s report showing the fourth consecutive monthly increase in new home sales is consistent with the positive trend in other housing indicators. July saw a 7.2% rise in existing home sales, while starts of single-family homes were up for the fifth month in a row. Improved activity has led to some stabilization in house prices, with the Case-Schiller measure (reported yesterday) showing its first increase in quarterly prices in three years.
However, although recent reports are encouraging, activity levels remains subdued and inventories elevated. To continue supporting the recovery in housing and the economy more broadly, we expect the Federal Reserve to maintain the Fed funds rate in the 0.00%-0.25% range until late next year.
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