New orders for manufactured goods fell last month but remained strong— weathering the storm and signaling an expanding economy. 

New orders for durable goods sank by 4.5% in January, the biggest decline reported since April 2020, according to the Commerce Department. The decline, however, was driven by a significant drop in passenger aircraft orders in the volatile transportation sector. Apart from that, new orders jumped to 0.7%, a 0.6 percentage point increase from December’s gain. The report also showed a softer increase in new orders in December: 5.1%, which is half a percentage point less than the previously reported number.

Orders for core capital goods, an indicator of business investment spending, also jumped to 0.8%, a significant rebound from the previous report. 

Taken together, the numbers point towards continued strong investment and spending – a trend that goes against the usual patterns when borrowing costs rise. Despite the expectations for a slowdown, the recent boost in new orders for capital goods has been the largest in the last five months and indicates that regardless of high-interest rates, business investment spending is growing, leading to a robust economy. These numbers indicate that a recession is not imminent, but they are also a sign that the Fed has not yet cooled off the economy enough to keep inflation in check. 

"The economy is continuing to grow, and the numbers prove that it has defied all expectations as of the first quarter of 2023," said Dr. Michael R Englund, chief economist at Action Economics LLC. "It is definitely stronger than we anticipated."

The increase in business investment could be partly the result of the tight labor market. Businesses that are having trouble finding more workers may be buying equipment instead to increase or maintain their productivity. 

Furthermore, a rise in orders for electronic appliances and motor vehicles also signals that consumers are still dipping into their savings to buy goods. That could continue in the coming months until their purchases are bogged down by consistently increasing interest rates.

Meanwhile, economists estimate that the upcoming report might show a hike in new orders owing to a recent Air India order that includes 190 737 Max jets, 20 Boeing 787 Dreamliners and ten widebody 777X planes for a total of 220 passenger airplanes. 

The strength of the consumer economy means the Fed likely has to continue increasing interest rates if they want to restrain and reduce inflation. 

"The Fed would have preferred to see softer numbers which would signal that the economy is slowing," said Russell T Price, chief economist at Ameriprise Financial Inc.