Capital spending appears to be slowing

May 27, 2025

April durable goods orders plunged 6.3% after a downwardly revised 7.6% rise for March. The median consensus estimate was for a 7.8% decline for April.

The primary drag resulted from a 51.5% drop in aircraft orders. Boeing new orders plunged to eight units in April from a supersized 192 in March. Orders for motor vehicles and parts fell nearly 3% as manufacturers contended with how to balance supply and demand given tariff-induced price hikes. Several automakers have announced that some popular models will show price increases of several thousand dollars, impeding customers from walking out of the dealer showroom with a new vehicle.

Other aspects of the report were mixed. Orders for computer equipment and electronics rose 1%, aided by continuing chip demand for data centers. Fabricated metals orders and machinery orders each rose 0.8%. Declines were seen in orders for electrical equipment, down 0.2%, and primary metals, down 0.1%.

Orders for nondefense capital goods excluding aircraft, a proxy for business capital spending on equipment, declined 1.3%, the largest decline in six months. That suggests the soft data of recent months due to tariff uncertainty is starting to seep into the hard data. Furthermore, the Institute for Supply Management (ISM) manufacturing purchasing managers' index (PMI) weakened to 48.7 in April from 49.0 in March. Below 50 indicates contracting activity.

Core capital goods shipments declined 0.1%, the first drop in six months, after an upwardly revised 0.5% in March. These data feed into the calculation of business fixed investment and suggest the second quarter is off to a weak start. We project business fixed investment to contract at a 5% annualized rate in the second quarter. 

The sharp decline in business spending and weak sentiment expressed by manufacturers in the ISM survey portends a weaker manufacturing sector in the quarters ahead. While we expect the US economy to avert a recession, the stagflationary scenario that appears to be unfolding will be a considerable challenge to both business and household spending in the months ahead.