New orders for long-lasting US manufactured goods grew slightly more than expected in February, though the modest gains are not a clear signal that the manufacturing sector is recovering from a recession. 

Overall, durable goods orders increased 1.4 percent, or $3.7 billion dollars, over the previous month, marginally above the 1 percent rise that economists had predicted. While it was driven by 3.3 percent growth in transportation orders, the increase was broad-based: almost all sectors grew last month, except communications equipment, electrical equipment and appliances, and defense capital goods. This follows a sharp decline in January, which was recently revised down to a decrease of 6.9 percent.  

Despite broad-based growth, the moderate increase in orders along with other indicators does not clearly suggest that the manufacturing industry is out of the woods after more than a year of contraction and interest rate hikes. The Institute for Supply Management’s manufacturing report, released earlier this month, hovered below 50 for the sixteenth consecutive month in February. Taken together, the two reports don’t give a clear signal that the sector’s outlook has significantly changed. 

In particular, orders for core capital goods, or non-defense capital goods excluding aircraft, were up 0.7 percent. Economists consider that metric a proxy for business investment. 

“These data are modestly signaling a contraction in activity,” said Kevin Cummins, Chief US Economist at National Westminster Bank, speaking about manufacturing data overall, including the durable goods report. For instance, the ISM number hasn’t moved significantly since the beginning of 2023. 

But, he added, “it’s still pretty modest. They’re not really contributing to the economy and they’re not taking away much either.” 

Some economists are optimistic about the sector. Will Compernolle, a macro strategist at FHN Financial, says while the January and February data are too “quirky” and volatile to get a good read on the manufacturing industry, things are looking up. 

“We ended last year on a strong note. If January was weak and February was a rebound, I still think that narrative holds,” he said.

Durable goods orders have trended upwards since 2021, even accounting for the pandemic recovery, though recent inflation spikes complicate this picture. Source: St. Louis Fed.

However, high interest rates have had a cooling effect on the manufacturing industry, which relies heavily on credit, by making it more expensive to finance business investments. Over the past two years, the Fed raised rates to a twenty-year high of 5.25 to 5.5 percent to combat inflation. It signaled earlier this week that it wouldn’t cut rates until late summer, while inflation remains stubbornly above its target of 2 percent. And while many economists expect the Fed can reduce inflation without triggering a recession, Cummins is less optimistic, and thinks this uncertainty has a chilling effect on manufacturers. 

“Our own expectation is that we’re going to hit a mild recession, so it’s not too surprising that we have seen softer CapEx and business investment and manufacturing activity,” he said, using a shorthand term for capital expenditures, or investments businesses make in long-term physical assets like heavy machinery. 

Indeed, some manufacturers are feeling the constraint of high interest rates. Jacob Anderson is the General Manager of Boonville Manufacturing Corp., which produces die cut parts, mainly for the dairy and automotive industries. He recently joined the family company, and is waiting for rates to drop so he can expand into a larger space and grow the business. 

“I wish rates would come down, but I don’t see that happening anytime soon,” he said. 

The 3.3 percent uptick in transportation orders, after an 18 percent decline last month, is an ongoing sign of turbulence at Boeing. This is a particularly bad period for the nation’s leading aircraft manufacturer, after the company’s CEO and other senior leaders resigned this week amid escalating safety concerns. 

“The orders data from Boeing has come down pretty substantially,” said Cummins. “Boeing did have an increase in orders relative to January’s number, but it wasn’t all that much.”

While orders for nondefense aircraft tend to fluctuate significantly, a steeper-than-usual decline in January and a modest increase in February reflect ongoing issues at Boeing. Credit: St Louis Fed.

One potential silver lining: despite monthly volatility, businesses have gotten better at anticipating demand in the medium term. 

“Businesses are much better at monitoring customers and not over-producing. We used to have inventory cycles,” said Peter Morici, a professor and economist at the University of Maryland’s business school.  “All this data that’s collected on the web does improve efficiency.”