The headline did not look too positive: “US Durable Goods Orders Fall 1.3% in August”. Yet the data was much more positive than that initial headline indicated. In fact, the reason for the decline was entirely due to a drop in orders for aircraft, which had surged the previous month. To really understand this report, we need to look at an important sub-category of orders called Orders for Non-defense Capital Goods excluding Aircraft. This category, sometimes referred to as “core capital goods” represents roughly one-third of all durable goods orders. In August it recorded an increase of 4.1%, the third increase in the past four months. After falling 32% from the peak, core capital goods orders are up 29% since April 2009
This is a stark contrast to the consumer durable goods sector. Much smaller in size than capital goods (largely autos, trucks and appliances) orders for consumer durable goods, which fell by 42% during the recession, have barely recovered.
The chart below shows the performance of orders for capital and consumer goods over the past 13 years. The current performance is markedly different than in 2002-2003 when consumer durable goods orders recovered first and fastest. Today’s recovery is a business driven and led recovery.
For the real estate sector the increase in spending on the strength of this recovery rests on the confidence of the business sector. Businesses need to feel confident about future profits before they will hire and boost demand for real estate. Currently, that confidence is fragile but appears to have improved since the summer as the stock market has increased. If this trend continues, more hiring will occur, absorption will take place and the outlook for real estate markets will improve. But watch those business confidence measures; they are more important than ever in the current recovery.
New York Area Research