Strong durable goods orders and shipments in July showed that businesses continue to make long-term investments despite rising prices and concerns of a recession.
Although the top-line number for new orders reported by the Commerce Department on Wednesday remained flat on the month compared to June, core capital goods orders increased by 0.4% from June, beating market estimates. The core capital goods category excludes defense and aircraft orders and is a proxy for future private business investments.
And shipments for core capital goods posted an even bigger increase in July, rising by 0.7%, which also beat market expectations.
Because both numbers were in nominal terms, the significant drop in July’s inflation only magnified how resilient business investments were in the first month of the third quarter. Core inflation fell from a 0.7% monthly increase in June to 0.3% in July, according to an earlier report from the Bureau of Labor Statistics.
If the pace of investment holds up and inflation continues to ease from its recent high, we should expect the nonresidential investment component of total gross domestic product to bounce back in the third quarter from the 0.1% decline in the previous quarter. Core capital goods make up a large portion of that component of GDP.
Pending home sales
But the residential investment component will remain a significant drag on GDP as the housing market continues to crater.
In a separate report from the National Association of Realtors, pending home sales fell by 1% in July and by 22.5% compared to a year ago. Excluding the early months of the pandemic in 2020, pending sales were the lowest since 2011.
While existing home sales contribute little to the residential component of GDP, the sharp drop in sales echoed what has happened to the housing market after a hot run during the pandemic.
We continue to expect the housing market to fall further as the Federal Reserve continues its campaign of rate increases.
