US: June durable goods orders increase by 1.9%

Durable goods orders rose 1.9% month-on-month to $272.6 billion in June. This reading came in much better than the market expectation of a 0.4% drop. Retail stocks, on the other hand, increased by 1.9% in June, above the 1% expectation, while the previous month’s data were revised to 1.6% from 1.1%. Inventories and durable goods orders are important in helping to clarify whether a recession is imminent, while current data can be positive on the 2Q22 GDP reading and herald that the technical recession is not yet in the grip.

If we look at the sub-items; New orders excluding shipping rose 0.3%, while new orders excluding defense rose 0.4%. Core data was revised downwards to 0.5% from a 0.7% increase in the previous month. Transportation equipment rose 5.1 to $92.7 billion, up three months in a row. In the narrowest indicator that directly affects the growth calculation, the item entered increased by 0.7%, while the previous month’s data was revised from 0.8% to 1%. Volatile categories show the underlying trend a little too positive. Aircraft orders are shifting in seasonally adjusted terms, plus Russia’s invasion of Ukraine seems to have played a role in defense spending.

A hallmark of a recession is investment decline, often caused by a slowdown in inventory creation or direct destocking. Therefore, in terms of the general trend of the data, firstly, it is necessary to exclude the misleading effect of volatile items, and secondly, it is necessary to evaluate the event together with the stock data in order to take into account the duration of the goods in stock. The increase in capital goods is positive in terms of investment tendency. Apart from that, the increase in inventories will put a strain on the cost management of manufacturers and retailers when the consumer’s trend slows down (which will slow down due to inflation), both on a retail and wholesale basis. Because on the one hand, as inflation increases, the seller, who thinks about the inventory cost, will transfer less, and on the other hand, the buyer’s desire to buy in advance against inflation will create a shortage of goods. In an inflationary environment, it becomes difficult to do this management. In a recession environment, however, this time, as the situation of not being able to consume will come into play, the price of the goods remaining in stock will decrease and the profit margins will decrease. We will see that economic uncertainty and higher costs will increase institutional prudence in the future.

If we look at the Fed’s point of view; The US 10-year bond yields estimate that monetary tightening will lose momentum, reflecting stagflation or recession concerns. Short-term interest rates, on the other hand, continue to increase due to the current situation. Due to the stagflation dynamics, the Fed seems to be more willing to adopt a Volcker-like policy path in the short term. Since the monetary policy and interest perspectives are different from 2014 and the inflation risk is active, it is not something to be expected at this stage for the Fed to stop rate hikes. The table is more reminiscent of the situation from the 1970s to the first half of the 1980s. Oil prices, geopolitical risk, global recession and high inflation… The Fed wants to avoid additional inflation effects by avoiding the inflation effects of quantitative easing and taming demand. In the longer perspective, it is likely that monetary policy will lose momentum and the Fed will turn to a recession-avoiding perspective this time.

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