Friday, August 24, 2007


Durable Goods Orders rise 5.9% in July

New orders for durable goods rose 5.9% in July versus a consensus expected gain of 1.0%. Excluding transportation, orders rose 3.7% versus a consensus expected gain of 0.6%. Over the past three months, new orders excluding transportation are up 9.1% at an annual rate.

Transportation equipment orders jumped 10.8% - on the back of strong aircraft and autos orders. Orders also increased for every other major category. The only sub-category that showed any significant decline was electrical equipment.

When calculating business investment for the GDP accounts, the government uses non-defense capital goods shipments excluding aircraft. That measure rose 0.5% in July, but was revised to show a 0.8% decline in June versus the originally estimated decline of 0.4%. On net, these shipments are up 1.4% at an annual rate versus their second quarter average.

Unfilled orders rose 2.4% in July and are up 20.9% versus a year ago.

Implications: Today’s durable goods report shows recent business investment remains healthy. Excluding transportation, orders are up 9.1% at an annual rate in the past three months, which is significantly faster than the year-over-year growth rate of 1.3%. These data show clearly the re-acceleration of growth from the slowdown in late 2006 and early 2007. We continue to forecast 3% real GDP growth in Q3 and view today’s surge in new orders as a sign that economic growth will remain strong in the quarters ahead as manufacturing overcomes weakness in the housing market.

New single-family home sales increased 2.8% in July to an annual rate of 870,000. The consensus expected an annual rate of 820,000.

By region, sales in the West accounted for almost all the increase nationwide. Sales fell in the Northeast and were roughly unchanged in the Midwest and South.

At the current sales pace, the supply of unsold new homes dipped slightly to 7.5 months, due to both faster sales and fewer homes for sale.

The median price of new homes sold was $239,500 in July, up 0.6% versus a year ago. The average price of new homes sold declined to $300,800, down 3.4% versus last year.

Implications: Today’s report on new home sales was a pleasant surprise, with sales rising at a healthy pace versus a consensus expected decline. From January through July, new home sales have hovered between an annual rate of 830,000 and 910,000. In our view, although new home sales still have some room to fall, we have already seen the worst of the year-to-year percentage declines. However, with inventories still relatively high, residential construction and home prices should feel downward pressure in the months ahead. Residential construction subtracted a full percentage point from real GDP growth in the year ended in the first quarter, but only half a point in the second quarter. We believe housing’s drag on real GDP growth will remain about half a point through mid-2008, with offsets from consumption, business investment (where construction is booming) and exports keeping overall real GDP growth in the 3% - 3.5% range.

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