Over the cliff: Durable goods orders drop 13.2% in August; Update: Q2 GDP downgraded from 1.7% to 1.3%

A key measure of the economy, especially in manufacturing, just had the bottom fall out.  Orders for durable goods dropped 13.2% in August, the worst decrease in almost four years, and a large signal that the American economy is diving into a recession:

New orders for manufactured durable goods in August decreased $30.1 billion or 13.2 percent to $198.5 billion, the U.S. Census Bureau announced today. This decrease, down following three consecutive monthly increases, was the largest decrease since January 2009 and followed a 3.3 percent July increase. Excluding transportation, new orders decreased 1.6 percent. Excluding defense, new orders decreased 12.4 percent. Transportation equipment, down following four consecutive monthly increases, had the largest decrease, $27.8 billion or 34.9 percent to $51.9 billion.

The news was even worse for capital goods, indicating that businesses have stopped investing in themselves:

Nondefense new orders for capital goods in August decreased $18.5 billion or 24.3 percent to $57.7 billion. Shipments decreased $1.2 billion or 1.7 percent to $69.5 billion. Unfilled orders decreased $11.9 billion or 2.0 percent to $580.5 billion. Inventories increased $1.5 billion or 0.9 percent to $171.9 billion. Defense new orders for capital goods in August decreased $4.1 billion or 40.1 percent to $6.1 billion. Shipments decreased $0.1 billion or 1.7 percent to $8.1 billion. Unfilled orders decreased $2.0 billion or 1.2 percent to $165.6 billion. Inventories increased $0.4 billion or 1.8 percent to $21.4 billion.

Unfilled orders — the “backlog” on which every manufacturer relies for continuity and security — also dropped by 1.7%, the largest drop since December 2009:

Unfilled orders for manufactured durable goods in August, down following two consecutive monthly increases, decreased $16.9 billion or 1.7 percent to $978.7 billion. This was the largest decrease since December 2009 and followed a 0.7 percent July increase. Transportation equipment, also down following two consecutive monthly increases, had the largest decrease, $12.0 billion or 2.1 percent to $568.6 billion.

Inventories, however, rose by 0.6%, which indicates that demand is perhaps even worse than this report would indicate.

Reuters points out that most of this fall came from transportation:

New orders for long-lasting U.S. manufactured goods in August fell by the most in 3-1/2 years, pointing to a sharp slowdown in factory activity even as a gauge of planned business spending rebounded. …

Economists polled by Reuters had expected orders for durable goods — items from toasters to aircraft that are meant to last at least three years — to fall 5 percent.

Last month, the drop in orders reflected weak aircraft and automobiles demand. Boeing received only one aircraft order in August, down from 260 in July, according to information posted on the plane maker’s website.

Transportation equipment tumbled 34.9 percent after racing ahead 13.1 percent in July. Excluding transportation, orders fell 1.6 percent after dropping 1.3 percent the prior month. Economists had expected this category to rise 0.3 percent after a previously reported 0.6 percent fall.

And while capital goods orders dropped by a huge margin, non-defense capital orders actually rose:

Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, rose 1.1 percent, halting two straight months of hefty declines. That was above economists’ expectations for 0.5 percent gain.

That makes this appear to be a “fiscal cliff” reaction, as defense contractors lose orders ahead of the sequestration cuts.  That may boost Republican efforts to find a solution to that part of the sequestration equation, and put pressure on the White House to fix the problem as a way to avoid these kinds of headlines before the election.

Speaking of which, the BEA also delivered its final word on Q2 growth, scaling down their last estimate of 1.7% to 1.3%:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 1.3 percent in the second quarter of 2012 (that is, from the first quarter to the second quarter), according to the “third” estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 2.0 percent.

The GDP estimate released today is based on more complete source data than were available for the “second” estimate issued last month. In the second estimate, the increase in real GDP was 1.7 percent (see “Revisions” on page 3).

Real final sales of domestic product rose 1.7%, which is at least a decent sign that demand was better than overall sales.  It’s still a stagnation figure, but the upshot is that inventories declined overall as sales outstripped production by a small amount.  Under normal circumstances, that would be a good indicator for better days, but the 13% tumble in durable goods shows that the economy appears headed in the opposite direction.

Update: While we’re on economic indicators, the weekly jobless claims report had a surprising decline in applications:

In the week ending September 22, the advance figure for seasonally adjusted initial claims was 359,000, a decrease of 26,000 from the previous week’s revised figure of 385,000. The 4-week moving average was 374,000, a decrease of 4,500 from the previous week’s revised average of 378,500.

The advance seasonally adjusted insured unemployment rate was 2.6 percent for the week ending September 15, unchanged from the prior week’s unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending September 15 was 3,271,000, a decrease of 4,000 from the preceding week’s revised level of 3,275,000. The 4-week moving average was 3,295,500, a decrease of 15,000 from the preceding week’s revised average of 3,310,500.

We’ll see if this means anything significant, but I doubt this outweighs the sudden drop in manufacturing activity as an indicator of what’s ahead.

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