Durable goods orders fell 1.0% in June after an upwardly revised decline of 0.8% in May (previous: -1.1%). This was well below our (1.5%) and consensus (1.0%) forecasts. However, the weakness in the headline was mostly driven by the volatile, non-core components.

Nondefense aircraft orders were down 25.6%, following a similar drop of 30.2% in May, and defense orders fell 5.5%. Stripping these out, core capital goods orders, a more accurate gauge of business spending, rose 0.6% in June, in line with our estimate of a 0.5% gain and on the back of an upwardly revised 4.6% jump in May (previously 3.9%).

This points to a considerably brighter picture than the headline numbers suggest. Within the core, orders for electrical equipment, appliances, and components jumped 3.7%, offsetting declines in machinery and computer and electronic products (-0.7% and -1.9%, respectively). Manufacturers continued to restock inventories in June, with total durable goods inventories up 0.9% on the month after a 1.1% rise in May.

On the shipments side, headline shipments declined 0.3% in June, but core capital goods shipments rose 0.2%, following a 1.5% gain in May. In Q2 as a whole, core capital goods orders and shipments increased 25.1% and 15.8% q/q saar, respectively, an acceleration from the Q1 pace. We continue to look for a 20% q/q saar gain in the Q2 equipment and software investment component of GDP, consistent with our forecast for GDP to rise 3.0%.

Theresa Chen wrote in a Barclays Capital Research report.