Durable Goods Orders Plummet

Durable goods orders plummeted 4.4% in October, almost twice market expectations. A sharp drop in aircraft and defense orders accounted for a portion but not all of those losses. Orders for defense aircraft and parts surged 117% in September as the government scrambled to get fiscal year 2018 contracts in place prior to the end of the month; October 1 marked the start of the new fiscal year. Nondefense aircraft orders were also weak after showing strength earlier in the year. Gains outside of the volatile transportation sector were mixed. Orders of computers and electronic equipment picked up in response to 1) hopes for another successful launch of a new iPhone - it is one the few single indicators that can move the needle on electronic purchases but disappointed this time, and 2) an attempt by producers to stockpile ahead of threats of additional tariffs.

The administration has sent mixed messages with regard to trade relations with China, Japan and Europe. The concern is that we could get a whole new round of 25% tariffs on everything we import from China - $517 billion - by early next year and 25% tariffs on $250 billion in vehicles and parts from Japan and Europe. This is at the same time that current tariffs continue to disrupt supply chains and squeeze manufacturers’ margins. The only winners are those protected by the tariffs and the few companies with enough pull with the administration to secure waivers for tariffs on their input costs.

Uncertainty surrounding tariffs has already taken a toll on CEO confidence, which has delayed investment. It is hard to make a decision to expand when you have no idea how much tariffs will distort costs or your competitiveness vis-a-vis the rest of the world.

Core durable goods orders (excluding aircraft and defense) flatlined during the month after declining the previous two months. That bodes poorly for future business investment and tracks other indicators showing a slowdown in the manufacturing sector. Tariffs and trade concerns pulled economic activity forward into the middle of 2018. Now we are set up for some weakness, even if the worst in trade scenarios is averted.

Core durable goods shipments were a little better, rising 0.3% in October from September. The data for core shipments is used to track what companies actually spend on new equipment and machinery in any given quarter. The problem is that October’s gains followed two months of declines, which means we need to see a rapid turnaround in sentiment to end the year with any kind of real gains in investment.

The recent drop in oil prices represents another fly in the ointment as it has curbed investment in one of the few places it was booming: the oil patch. The administration pushed Saudi Arabia hard to boost oil production and lower prices at the gas pump ahead of the midterm elections; the argument was that they would make up for production lost to sanctions on Iran and falling Venezuelan production. Waivers for key consumers of Iran’s oil offset the extra Saudi production and lowered prices more than expected. The unintended consequence was a squeeze on investment in our own oil producing capacity.

Bottom Line
Business investment, which looked like it was finally making a comeback has petered out again. This, coupled with hesitation to make commitments on 2019 until the trade situation is sorted out, is expected to put a damper on investment as we move into 2019. Our forecast has real GDP growth coming in at 2.4% in the fourth quarter. That would put the average for the year below 3%.

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