Unexpectedly strong durable goods orders and trade data temper recession concerns

REAL ECONOMY BLOG | July 27, 2022

Authored by RSM US LLP

U.S. durable goods orders and the goods trade deficit in June beat expectations, according to data released Wednesday, tempering recession concerns before the Federal Reserve is expected to announce a rate hike later in the day.

On top of that, shipments of nondefense capital goods excluding aircraft—a proxy for private businesses spending—remained robust in the second quarter. The series feeds into GDP calculation, which will be released on Thursday.

Although the data points on durable goods orders and the advanced goods trade balance should be available to the Fed before its rate announcement Wednesday afternoon, the upside surprise does not change our expectation for another rate hike of 75 basis points.

Durable goods orders

The top line durable goods orders rose 1.9% in June, significantly above the market forecast of a 0.4% decline. Orders for nondefense capital goods excluding aircraft, which account for future private investment, rose 0.5%—or 6.3% on a three-month average annualized basis.

With core inflation based on the core personal consumption expenditures deflator running around 0.3% every month since February, businesses showed strong resilience in terms of spending despite inflation pressure.

Focus stayed on the data reflecting shipments of nondefense capital goods excluding aircraft, which rose 0.7% in June and 9.0% on a three-month average annualized basis.

Strong growth in the total number of durable goods orders in June, however, pushed the number of unfilled orders up to 0.7% from 0.3% previously. Unfilled orders for core capital goods remained at 0.2% in June.

Advance goods trade deficit

Data on the goods trade deficit showed significant improvement in June, reaffirming that the economy was not in a recession in the first half of the year.

The goods trade deficit dropped to $98.2 billion from $104.3 billion in May, driven by sharp growth in exports—up 2.5% on the month. Imports of traded goods, on the other hand, fell 0.5% in June.

The data was in line with our forecast of much stronger total exports in the second quarter. Together with the significant decline in imports, the net exports component in the calculation for GDP in the second quarter will be a key component that keeps growth positive.

The takeaway

Our forecast of 0.7% growth in GDP in the second quarter looks a lot more achievable given Wednesday’s data, especially when there is widespread fear of another decline in GDP growth, which would meet the definition of a so-called technical recession.