Experts predict moderate gains in
1. Exclude the transportation numbers, please
Economists are estimating that new orders for durable goods — products that have a life expectancy of three or more years — will decrease in February. But the category to watch is total orders without transportation. It’s a much more reliable indicator of industry growth because it removes orders such as aircraft parts that fluctuate unpredictably and can distort the data. In January, that number dipped 0.1 percent.
Economists expect a slight increase in orders after transportation is removed, mostly due to low inflation and the Federal Reserve’s pause on interest rate hikes. If the report shows modest gains in this category, it will indicate that growth is slowing, but not coming to a grinding halt.
“We’re not falling off a cliff in the manufacturing sector, it’s just that activity is easing,” said Michael Moran, chief economist at Daiwa Capital Markets.
2. Global uncertainties will continue to affect business investment
Core capital goods orders — which are a strong indicator for business investment — increased 0.8 percent in January, but that doesn’t necessarily mean business confidence is improving.
The increase comes after steep declines in the past months, and there is an overall softening trend in core capital goods orders due to global uncertainties such as tariffs, Brexit and economic slowdowns in Europe and China, all of which are eroding business confidence.
“One of the important determinants of business capital spending is the attitudes of business executives and their economic outlooks, and if that outlook is fading, then I wouldn’t look for strong results on capital spending,” Moran said.
Whether or not core capital goods orders continue to grow will indicate where the manufacturing sector sits regarding business investment confidence. But until these uncertainties clear, businesses are going to remain cautious.
3. Transportation turbulence
Transportation orders are anticipated to drop in February. But it won’t be due to the crash of a Boeing 737 Max 8 aircraft— the second in five months — which triggered an investigation into their newly installed software system. Mainly because the crash was in March.
Boeing has experienced order cancellations since the crashes, but economists don’t expect to see them show up in February’s report and attribute the likely drop to a month of weak orders unrelated to the incident.
“Orders for Boeing were pretty soft,” said Ryan Sweet, head of monetary policy research at Moody’s Analytics. “There have been some cancellations, but the timing of when they show up is unclear.”
The aircraft manufacturer makes up a significant proportion of civilian airplane orders and additional cancellations or plunges in orders in the coming months will pull down the headline number.
Transportation is notorious for skewing the numbers and creating noise in the data. The Boeing crisis may have just turned that up a decibel level, potentially dragging durable goods down for months to come.
4. Shipments outpacing orders in core capital goods
Solid shipment orders are a good sign because they represent industry productivity. However, if they grow too quickly relative to orders, it could mean trouble ahead.
Shipments for core capital goods surpassed orders last November. If this trend continues, it could lead companies to cut production which might cause them to decrease spending, creating a cascade effect that could ultimately decrease orders, analysts said.
“It ends up as a self-reinforcing weakness in orders,” said Christopher Low, chief economist at FTN Financial.
5. Best days are behind us
Overall, economists forecast that the trend for durable goods will continue to soften as the global economy slows and the manufacturing industry comes down from a sugar high fueled by last year’s tax cuts.
As the benefits from that boost wear off, durable goods must face the realities of a global economic slowdown. A decrease in export demands from China, as well as steel and aluminum tariffs, is expected to stall sector growth well into the next quarters.
“Manufacturing enjoyed its best year in a decade in 2018,” Low said. “U.S. manufacturing is likely to slow almost to a standstill by the end of the year.”