Durable-Goods Orders Appear to be Plateauing

By Robert Hughes

New orders for durable goods decreased 2.1 percent in April, led by a 5.9 percent fall in transportation equipment. Over the past year, orders are up just 0.2 percent to $248.4 billion, about 5 percent below the all-time high of $262.2 billion in September 2018 but more than 70 percent above the March 2009 recession low (see top chart). Excluding the volatile aircraft category, orders were off 0.9 percent for the month and are 1.5 percent above April 2018 and just 1.2 percent below the all-time high in September (see top chart again).

The results for the categories of durable goods shown in the report were mixed in the latest month. Among the industries showing decreases, nondefense aircraft orders fell 25.1 percent while defense aircraft fell 2.4 percent, and motor vehicles were down 3.4 percent for the month. Combined, all transportation equipment orders were off 5.9 percent for the month. Primary metals orders fell 0.8 percent after a 1.9 percent drop in March. Computers and electronics products were down 0.4 percent as a 4.0 percent gain in computers was more than offset by a 5.5 percent drop in communications equipment orders.

Categories showing gains for April are electrical equipment and appliances orders, up 0.9 percent in April after a 0.5 percent rise in March; fabricated metal products, up 0.4 percent, and machinery orders, gaining 0.1 percent. The catchall “other durables” category was unchanged for April after a 0.4 percent rise in March.

Within the report on 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 can have a major impact on future productivity trends, and productivity is critical for helping offset cost increases as well as raising living standards over the long term. Second, capital-goods orders tend to be early indicators of turns in 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 Leading Indicators index.

On a nominal basis, new orders for core capital goods fell 0.9 percent in April. In a manner similar to the broader durables-goods category, core capital-goods orders appear to be plateauing near the $70 billion level, the peak of the two prior business cycles (see bottom chart).

However, capital goods are not the only categories of business investment. Investment in structures and intellectual property are major categories of business fixed investment along with equipment. Data from the National Income and Product Accounts (the source for Gross Domestic Product) show nominal business fixed investment, which includes equipment as well as structures and intellectual property, continue to trend higher, rising at a 4.1 percent annualized rate in the first quarter and posting a gain of 6.4 percent from a year ago.

Concerns over trade policy, escalating trade wars, and global economic growth, may be starting to impact investment plans. However, the labor market, consumer sentiment, household and corporate balance sheets, personal income, and corporate sales and earnings, all remain generally healthy. While uncertainty regarding the outlook is significant, the outlook is cautiously positive as the economy approaches the record for longest U.S. economic expansion.

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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.