Headline Misleading for Durable Goods

Durable goods orders jumped 0.8% in September following an upwardly revised trade 4.6% in August. Orders for aircraft and parts in the defense sector surged 119% in September as the federal government rushed to place orders prior to the end of the fiscal year on September 30. The federal budgets for fiscal years 2018 and 2019 included significant increases in spending on defense.

Core durable goods orders (excluding defense and aircraft orders) which determine business investment for the quarter slipped for the second consecutive month in September. A drop in orders for fabricated metals, computers and electronics accounted for the weakness. Some companies bought ahead of additional tariffs that were applied in August and September; they are now backing off those orders.

Core durable goods shipments were flat in August and September after posting a strong gain in July. In response, overall business investment, which will be released with the GDP report for the third quarter on Friday, looks like it remained solid but not spectacular over the summer. The real risk for business investment is in the outlook for 2019. Uncertainty over the prospect of a full-blown trade war with China and tariffs more generally are prompting some companies to delay investments for next year.

Bottom Line
Trade tensions and tariffs have begun to distort the timing of business purchases. It is still too early to determine how much of a toll they could take on investment down the road. This is the nature of the beast when it comes to trade tensions. They take a long time to show up in the data and compound in aggregate measures of the economy, especially when it is already humming.

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