Capital Spending Prospects Remain Favorable
New orders for durable goods jumped 1.8 percent in January following revised monthly declines of 0.8 percent and 4.7 percent in the prior two months. The gain is January was largely a result of enormous increases in both defense and nondefense aircraft orders. Nondefense aircraft orders surged 69.9 percent for the month, while defense orders jumped 59.9 percent. Because of the large per-unit price and the tendency for airlines to place orders for multiple aircraft at once, both of these data series tend to be extremely volatile. If all transportation equipment (aircraft, autos, truck, etc.) was excluded, new orders for durable goods fell 0.2 percent for the month of January following gains of 0.9 percent and 1.1 percent in the prior two months. Among the other industries showing gains: Orders for fabricated metal products rose 1.9 percent, machinery orders were up 0.5 percent, and computers and related equipment orders gained 3.9 percent. The major decliners were primary metals, down 1.6 percent; communications equipment, off 5 percent; and the catchall other durables, with a 0.3 percent fall. Overall, total orders for durable goods have been trending nearly flat over the past three-and-a-half years.
Within the report for new orders for durable goods are data on new orders for capital equipment or business investment. This subcategory is particularly important for two reasons. First, business investment has a major impact on future productivity trends, and productivity is critical for helping to offset cost increases as well as for raising living standards over the long term. Capital goods orders are also important, as they tend to be early indicators of the business cycle. Real new orders for core capital goods, that is, real nondefense capital goods excluding aircraft, is one of the indicators in AIER’s business cycle Leaders index.
On a nominal basis, new orders for core capital goods fell 0.4 percent in January. However, that decline followed three consecutive monthly gains as well as gains in six of the past eight months. That performance has resulted in a clear turn in the trend of new orders for core capital goods, which are now 3.9 percent above their recent low in May 2016. If the upward trend in nominal orders for core capital goods is still in place after adjusting for price changes, it will be a positive contributor to our Leaders index.
Our next Business Conditions Monthly report, due out by mid-March, will provide detailed results for all of our Leaders indicators as well as a closer look at capital spending prospects.
Robert Hughes
Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.
