This morning’s strong June durable goods order report was highlighted by a 0.7% increase in nondefense capital goods orders excluding aircraft, also known as core capital expenditures. The May core capex growth rate was revised up to 2.2% from an earlier reading of 1.1%.
Core capex is a key indicator of business investment in America, and the strength is very encouraging.
Here’s TD Securities’ Eric Green:
…The key focus of this report should be on the persistent strength in core capital goods orders ex defence, ex aircraft. This feeds directly into our estimates for investment spending and the recent trend has not just been positive, it has been exceptional. These orders rose 0.7% (expected 0.6%) despite an upward revision from 1.1% to 2.2% the prior month. Over the past four months these orders have averaged gains of 1.3%. Coupled with the surge in cap ex intentions six month forward on the Philadelphia survey, this data suggests that a shift higher in investment spending is clearly in the offing. Weak shipments today do point to tepid capex spending in Q2.
The focus, however, should be on the orders cycle. With unfilled orders on the up and core orders swinging higher the odds of a shift higher in investment spending, so critical to the economic outlook, is beginning to gel. It suggests our estimate for a bounce in GDP from 1.0% in Q2 to 2.4% in Q3 remains a reasonable one.
Last week, we learned that the Philly Fed Manufacturing index surged to an 11-month high.
Add to that the huge June jobs report, and you can see why people are feeling increasingly optimistic about the economy.
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