The durable goods report brings good news for industrial sector investors
The Industrial Select Sector SPDR Fund (XLI) rose by 1.23% on Wednesday’s close following the release of a positive durable goods report in the US. On July 27, the United States Census Bureau released its durable goods report for June 2015. The manufacturing sector in the US continues to show weakness. This is reflected in XLI’s movement over the past year, as seen below. Nevertheless, orders for durable goods were up a good 3.36% in June over the previous month.
The SPDR Dow Jones Industrial Average ETF (DIA), another industrial sector–tracking ETF, rose by 0.65% as of close on July 29. Industrial sector firms such as Northrop Grumman (NOC), Stericycle (SRCL), and Raytheon (RTN) shone on Wall Street. NOC rose by 6.18%, SRCL rose by 4.2%, and RTN rose by 4.11%. These companies have yielded 17.67%, 7%, and 0.95% so far this year. XLI and DIA have yielded -3.99% and -0.37% in 2015.
The durable goods report is key to industrial sector investors
An increase in durable goods orders is desirable for the US economy (SPY) (IVV). These orders translate to increased manufacturing and economic activity, which leads to growth. Investors and players in the industrial sector are keenly interested in these numbers.
The reading came in strong at 3.4% against consensus estimates of a 3.1% gain in July and against a 2.1% drop in May. On a year-over-year basis, new orders for durable goods changed by -2.8% in June 2015.
Factors affecting durable goods orders in the US
Durable goods have been affected so far this year by two key factors:
• the decline in oil prices
• the strengthening US dollar
While the former has hit orders in industries related to the energy sector, such as transportation and air travel, the latter has affected export orders, since US exports become less competitive in foreign markets when the dollar is stronger.
These factors have also restricted manufacturing sector growth in the US. The Dallas Fed’s latest manufacturing activity report substantiates this point. We’ll take a closer look at this report in the next part of this series.