Durable goods orders surged 2.6% in March, much more than expected. February orders were revised up slightly. The gains were concentrated in aircraft orders, which picked up nearly 45% and 40% during the last two months, respectively. Nondefense aircraft orders were up 55% from a year ago in March. Orders for motor vehicles were flat. Orders excluding the volatile (and much revised) transportation sector were also flat.
Core durable good orders excluding defense and aircraft slipped 0.1% in March after adding 0.9% during the prior month. That suggests that actual investment plans remain solid but not spectacular. So far, we have seen few signs that the tax cuts are stimulating investment. The bulk of the incentives in the reform portion of the corporate cuts for investment affect medium-term, not near-term investment decisions. The marginal cost of making long-term investments has fallen relative to what it was prior to the tax cuts.
Defense orders remained muted in the first quarter but are expected to pick up fairly quickly in the months to come. The defense sector is one of the primary beneficiaries of increased federal spending.
Separately, the trade deficit in goods narrowed in February, suggesting a bit more growth from trade. Imports fell as exports picked up except for vehicles, which slipped. The increase in exports was driven by food and machinery.
The goods sector continued to improve in the first quarter although investment is more tentative outside of aircraft. Concerns about trade and tariffs are taking a toll on business optimism, offsetting some of the euphoria Congress hoped to achieve with tax cuts. First quarter growth will be a little soft but that has become common. The increase in government spending slated for the rest of the year suggests a fairly large rebound in growth. Our forecast holds for 2018 growth at 2.7%, the strongest of the expansion.
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