Durable goods orders continued declining in February, signaling that the rising borrowing costs might be sparking trouble for the manufacturing industry.
New orders for all long-lasting goods fell by one percentage point this month after plunging by 5% in January, according to the Commerce Department’s recent report. Meanwhile, the value of core capital goods orders, excluding aircraft and defense – a measure of business investment –, grew by 0.2%, a slower pace of growth than in January.
These numbers are a sign that businesses have become more conscious of their investments thanks to the year-long interest rate increases by the Federal Reserve that have finally begun to cause cracks in the economy. The Fed’s efforts are now gaining an extra push by watchful banks who are starting to tighten credit standards due to a fear of bank runs.
“There is an overall weakness across the board, which isn’t shocking anymore,” said Stephen Stanley, chief economist at Amherst Pierpont. “It is very consistent with what the Fed is trying to do.”
Meanwhile, there was an unexpected downward revision to January’s numbers: Orders for core capital goods increased by 0.3% last month, half a percentage point less than 0.8%, the previously reported number.
Economists had previously expected to see a rise in transportation orders thanks to a slew of Boeing passenger aircraft orders but were met with disappointment when the latest numbers didn’t reflect any notable surge in that department. Instead, the report showed that bookings for commercial aircraft, which are volatile from month to month, decreased by 6.6%.
Since the failure of Silicon Valley Bank and Signature Bank has caused increased resistance to loaning out money amongst small to mid-sized banks in the US, the manufacturing industry has begun to suffer.
This is also evident from the ISM or the purchasing manager’s index, which hasn’t reached 50 in the last four months. Any number below 50 means that the sector is contracting.
Manufacturing, as an industry, is more interest rate-sensitive than other sectors because businesses and consumers alike buy many manufactured goods with credit. As a result, it is highly likely to show the first signs of an economic slowdown than, for example, the service industry.
For instance, the automobile industry is underperforming as new orders for motor vehicles, and parts fell by 0.5% in February, a disappointing number given the 0.3 percentage point rise in January.
Car loan rates are going up, and consumers are less inclined to purchase vehicles at the moment. Even automobile manufacturers are less likely to invest in car parts now that borrowing costs are constantly rising.
This might mean bad news for manufacturers like Salinas Industries in Ohio, who produce motor vehicle parts. Robert Salinas, the current manager at Salinas Industries, says business was just starting to revive post-pandemic.
“Now that the pandemic-caused production issues are over, we have new troubles to deal with,” he said, referring to the high interest rates and the banking crisis.
However, Salinas thinks that it’s hard to gauge the exact effect that the high interest rates will have on Salinas Industries. “I think we need to wait a month or two to see the actual impact,” he said. “I’m just hoping it won’t be as bad as it was during the pandemic.”
The United States spent $85 billion in technology investment last year, particularly in microchip manufacturing. But now, even that might not be enough to offset the current weakness of the sector.
“This month’s report indicates that manufacturing has finally begun to contract,” said Christopher Low, chief economist at FHN Financial.
The banking crisis is fairly recent, so the full extent of its impact has yet to be apparent, and despite the Fed’s current interest rate hike of 4.75% to 5.0%, inflation is continuing to stay strong. Even GDP growth has moderated, but the impact of the shrinking manufacturing sector hasn’t been strong enough to slow the economy to expected levels.
“The economy is, perhaps, still too strong from an inflation standpoint,” Low continued.