Business leaders are becoming more hesitant about the economic outlook this year.
Durable goods orders jumped by 3.2% in March after declining by 1.2% in February. The headline reading beat expectations for a 0.7% increase; so did orders excluding transportation, which rose by a better-than-expected +0.3%. Beneath the surface, the data tell a story of a factory sector that is downshifting in the present and into the future.
Core shipments, an input into current GDP calculations via the nonresidential fixed investment component, fell 0.4% in March. This follows a downwardly revised -0.4% for February from the originally reported -0.1%. Business spending is shaping up to be weaker than we expected and implies a larger drag on first quarter GDP, now estimated below 1%, which will be released tomorrow.
Nondefense capital goods orders excluding aircraft, a proxy for future business investment, fell 0.4%. What’s worse was February was revised sharply lower to -0.7% from -0.1%, an indication that business leaders are becoming more hesitant about the economic outlook this year.
Transportation orders, primarily aircraft, were the standout in the March report. Transportation orders rose 9.1% with nondefense aircraft orders surging by 78.4%. That was largely due to Boeing orders, which rebounded to 60 planes from five in February. Orders for motor vehicles and parts fell 0.1% and contracted in the first quarter as the industry continued to contend with labor shortages.
Electrical equipment orders rose 0.8%, up five months in a row, which is benefiting from longer-term investment associated with the Inflation Reduction Act. Orders for computers and related products rose 1.9% after very mild gains earlier in the year. Machinery, primary metals and fabricated metals orders posted muted increases, rising 0.1% each in March, a broad reflection of the weaker business climate trajectory ahead.
Transportation orders, primarily aircraft, were the standout in the March report.
Last week, the April S&P Purchasing Managers Index (PMI) data, both manufacturing and services, showed a pop in activity with the manufacturing component rising above the 50 break-even level and the price index climbing higher. Those data suggest the Fed should carry out another rate hike but contradict other PMI data showing weaker activity and pricing power.
Although the Federal Reserve’s interest rate hikes may be coming to an end, we forecast one more rate increase at the May 2-3 meeting. Another major factor is expected to impede business investment in the coming quarters. Banks were already tightening lending conditions for commercial and industrial loans this year. We expect the Fed’s new survey of lending activity, due May 8, to corroborate evidence from the Fed’s latest beige book that indicated banks are tightening lending standards amid increased uncertainty.