Orders for durable goods were up in January, but the overall report suggested that business investment growth is cooling off.
U.S. orders for durable goods—products that have a life expectancy of three or more years—increased 0.4% percent, the Commerce Department said Wednesday. The report also indicated that orders for core capital goods— a measurement indicative of business expenditure— were up 0.8%, after two months of decline.
The overall increase was mostly from an unexpected boost in the transportation category. And economists said that, despite gains in core capital goods, underlying data indicates that business investment has lost its momentum and a slowdown in growth is likely in coming months as issues surrounding a decline in the global economy, Brexit, tension with China, trade disputes and tariffs continue to affect business confidence.
“It was better than expected, but it was primarily just a surprise in the aircraft category,” said Michael Moran, chief economist at Daiwa Capital Markets of the headline number. “If you step back and look at orders excluding transportation, you’re running roughly flat since last summer.”
Transportation orders—which are notorious for being volatile—had led the overall increase for the past couple of months with a 15.9% increase in nondefense aircraft and parts orders in January. However—in light of the recent crisis with Boeing—transportation most likely will not be able to bolster the data in the future.
“The biggest surprise was the further strength in transportation orders. It’s aircraft and, unfortunately, with the Boeing story, it’s not likely to last,” said Christopher Low, chief economist at FTN Financial.
Boeing’s 737 MAX 8 was involved in its second fatal crash in five months last Sunday. Since then, several countries have grounded the model. Wednesday, Donald Trump announced that all U.S. carriers of the 737 MAX jet would halt flights as well.
Aside from the surprise jump in aircraft orders, economists were underwhelmed with the rebound in core capital goods. They said the increase isn’t enough to make up for two months of decline and is not necessarily representative of strong business spending in the future.
“Business investment last year was pretty good, but we were losing momentum already,” said Low. “Even the sectors where there were decent gains, they’re coming on the heels of pretty big declines. The bounce in orders was insufficient to reverse the recent decline, so it’s a partial recovery.”
Orders for core capital goods may continue to experience volatility as global economic uncertainties loom over business investment. For many businesses in the manufacturing industry, uncertainties, such as the steel and aluminum tariffs, have a significant impact on day-to-day operations.
Robert Roth, CEO of RoMan manufacturing in Grand Rapids, MI— a company that specializes in the design and production of transformers and power suppliers and works with steel and aluminum— said his company was hit hard by global tariffs.
“Whenever there is a government intervention like a tariff, where they are trying to accomplish one thing, there ends up being winners and losers, and in this particular case, our company is on the losing end of whatever the administration is trying to accomplish,” he said.
In addition to higher prices for steel and aluminum, RoMan also exports some of their products to China which gets slapped with a retaliatory tariff.
To absorb cost increases, Roth has increased the price of his product for customers and in some cases has resorted to sourcing product from foreign countries that don’t have a tariff.
“The foreign supplier is buying steel un-tariffed, and since they’re converting that into another product, it comes into this country un-tariffed. So, it’s put them at a competitive advantage over the domestic suppliers of the same product,” Roth said.
On the other hand, for Jonas Allen, president of Byer Steel manufacturers in Cincinnati, OH—a company that fabricates rebar and deals heavily with steel—the tariffs significantly helped his company raise revenue. Enough so that he was able to give out bonuses to his staff and even wants to add on an entire extra shift of about 11 people.
“The tariffs on steel have been helpful for our company,” he said. “It’s allowed us to have a little bit of upward price pressure, so it’s taken us from being a losing entity, where we were losing money, to a profitable one.”
He had noticed a decrease in orders recently for some of his product, but he attributed that to a decline in construction projects during the bad weather, specifically the polar vortex that enveloped most of the Midwest in January. He expects orders to pick up as the weather improves.
Despite companies’ different experiences, metal orders, which are good cyclical indicators for improved economic growth, didn’t fare well in the report. New orders for fabricated metals dropped .6% in January and orders for primary metals fell 2.0%.
“I think it’s supportive of the view that this area has lost momentum recently,” Moran said of the metals category.
Not all economists were so dismal about the report’s findings. Brett Ryan, U.S. economist for Deutsche Bank Securities, expressed optimism about the report and the manufacturing industry as a whole.
“It indicates a decent start to the quarter for business spending, and hopefully that momentum continues through the first quarter,” he said. “I think the manufacturing outlook still remains pretty decent.”
Still, he admitted that for durable goods orders to continue to grow, global factors would need to improve, specifically around tariffs and trade disputes with China.
“We need to see global growth rebound in the coming quarters for the manufacturing sector to get a big boost,” he said.