US Capital Goods Winter Thaws in July

There was enough in July’s capital goods data to remove most of the clouds which have hung over the investment cycle for the last six months. In July capital goods (nondef ex-air) orders jumped 2.2% mom, whilst shipments rose 0.6% and inventories fell 0.1% mom. The orders recovery was broadly-spread: autos rose 4% mom, computer/electronics rose 2% mom, machinery rose 1.5% and electrical equipment rose 1.3%.

The result is that the book/bill ratio recovered back to 1 for the first time since January, and the inventory/shipment ratio fell to 1.73x, also the lowest since January. Although this does not entirely remove all threats from the capital goods cycle, it does suggest the immediate pressures have been relieved.

In particular, inventories of capital goods have been kept essentially flat since September 2014, and with the inventory/shipment ratio now a full standard deviation lower than the post-2010 trend, any significant recovery in end-demand stands to be amplified by a rush to re-stock supply channels.

Still, for the capital goods sector, 2014-15 was a long long winter, and even July’s results are not stellar. In particular the book/bill ratio is still a full standard deviation below the post-2010 average. More, although orders rose a revised 1.4% mom in June and a further 2.2% in July, it still leaves the dollar total down 3.3% yoy and 6.6% below the 2010-2014 growth rate.  Similarly, although shipments rose 0.9% mom in June and 0.6% in July, in dollar terms they were up only 0.5% yoy in July and are 5.3% below the 2010-2014 trend.