The reduction in new orders suggests the manufacturing sector is still in a recession
US durable goods orders declined more than expected in January, a sign that the manufacturing sector has not yet begun to recover from two years of stalled growth.
Overall orders for long-lasting manufactured goods in January dropped 6.1 percent, or $18 billion, over the previous month. This was the steepest percentage decline in the monthly figure since it fell approximately 19 percent in April 2020, when most economic activity halted at the outset of the COVID-19 pandemic. Economists had predicted a 4.75 percent decline in overall orders for January.
The drop was largely driven by a decline in orders for Boeing planes amid the aircraft manufacturer’s ongoing safety woes, following a January Alaska Airlines flight during which a door plug blew off the 737 Max 9 plane mid-flight. Economists surveyed by Dismal Science had predicted the decline in Boeing’s orders.
But even excluding transportation, orders dropped in January by 0.3 percent, which surprised economists. The decline suggests that the manufacturing sector is still in a recession and that demand has not rebounded as the Federal Reserve has kept interest rates high to combat inflation.
“We obviously have this big issue with Boeing that is kind of crushing that topline number, but there really isn’t anything underneath that’s making up ground,” said Thomas Simons, Senior US Economist at Jefferies, referring to declines in other sectors of the report.
In particular, core capital goods, or orders excluding aircraft and defense, grew 0.1 percent over the previous month. Economists often consider this a proxy for business investment, as it’s more stable than the overall durable goods numbers after excluding aircraft orders, which can be volatile month over month. However, it’s likely that core capital goods orders also fell in inflation-adjusted terms, according to Kathy Bostjancic, Chief Economist at Nationwide Mutual.
“To us, it looks like business investment remains in the doldrums,” she said. “It tells us that business leaders are still uncertain about demand going forward, so that makes them hesitant to really ramp up their investment.”
The slowdown in manufacturing orders for January suggests that businesses remain cautious as they wait for interest rates to fall, which can stimulate demand for capital goods. Though inflation has cooled significantly since its peak in July, it slowed less than expected in January, growing at 3.1 percent. The Fed will likely wait to cut interest rates, which are now around 5.3 percent.
The report did have some good news. New orders for computers and electronic equipment grew 1.4 percent over the previous month. This increase can be attributed in part to funds made available to technology manufacturers through the Biden administration’s 2022 CHIPS and Science Act, according to Simons.
In addition, January data from the ISM Purchasing Manager Index showed that while the manufacturing sector is still contracting, the outlook is improving.
“There’s a difference between where we are, and where we think the sector’s going, as well as [where] manufacturers think activity is headed,” said Shannon Grein, an economist at Wells Fargo, referring to the comments manufacturers made in the December ISM Manufacturing report that they expect demand to grow when the Fed cuts rates.
The February ISM report comes out on Friday.