Businesses ordered more equipment in January, a sign of increased investment in American manufacturing that was buoyed by the recent trade deal but now faces the threat of coronavirus.
Orders for these goods – called core capital goods – were up 1.1% from December. This excludes goods for aircraft and defense, which are generally volatile from month to month because of sudden large orders. Including those components, orders were down 0.2%.
After a year of weak global growth and lackluster numbers, the report suggests American business investment seems poised for improvement. The results of the Phase 1 deal signed in January may steady the manufacturing outlook for the first time since the trade war began, but coronavirus has shaken up that trajectory.
“The key issue for business investment is uncertainty,” said Scott Brown, chief economist at Raymond James & Associates. “That makes firms more likely to stay back on their heels, reluctant to invest in new plants and equipment.”
Orders for durable goods excluding transportation were up 3.6%. Mild weather in January, which is helpful in manufacturing activity, may have contributed to that increase.
“Certainly, the report was better than anticipated,” Brown said. “Unfortunately, the COVID-19 throws that all out.”
It is too soon to say exactly how coronavirus will affect American manufacturing activity. Over the next two years, the Phase 1 trade deal with China will also affect the industry. In order for tariffs to be lifted, Chinese firms have committed to purchase $200 billion worth of American goods and services in agriculture, energy, manufacturing, and more. As Chinese factories resume production, meeting these goals for orders will be a focus. In turn, American firms are likely to see a boost as they work to meet the demand.
“It could well be that American factories are rational in seeing that they’re going to be quite busy over the next two years even if we are focused on the virus now,” said Michael Englund, chief economist at Action Economics.
Prior to the virus, the long-awaited deal meant that American producers had a better idea of their circumstance for the first time after weathering the trade war. The trade war slowed American manufacturing for most of 2019.
Boeing completely halted production of the 737 Max in January, which will also act as a drag on manufacturing activity this year. New orders for non-defense aircraft rose 346.2% despite Boeing reporting zero orders for January. But aircraft order numbers can be inflated in January as buyers often batch orders at the start of the year. Economists are expecting a reduction in the United States G.D.P. in the first half of this year as a result of the Boeing shutdown.
Orders for motor vehicles and parts were down -0.8% in January after being flat in December. The General Motors strike contributed to a steady decrease in orders last year, but the industry should rebound this year after a deal was reached in October and work was resumed.