Aircrafts Take Toll on Durable Goods Orders

Durable goods orders fell 1.7% in April, after surging an upwardly revised 2.7% in March. A swing in aircraft orders was the primary reason for the drop in orders. Aircraft orders fell nearly 30% in April after rising more than 60% the month prior. Some have asked if renewed sanctions on Iran will impact aircraft orders going forward. Boeing did not book the more than $30 billion in orders that they received with Iran, which looks wise in hindsight.

Orders outside of the volatile aircraft industry were strong with the exception of machinery. The primary and fabricated metals industries are doing better, in part due to tariffs but more generally because of a sharp pick up in domestic oil production. Oil prices have finally gotten high enough for investment to return to the sector. The gains in production are substantial and should help alleviate some of the rise in oil prices late in the year. Saudi Arabia still holds the ultimate fate of oil prices in its hands; they have been slow to increase their production, which could cause tensions with the administration.

Orders on computers (which include smart phones) and communications equipment was also strong for the month. Computer purchases remain more than 14% below what they were a year ago.

Core capital goods orders (excluding aircraft and defense), which most closely track plans for business investment, rose 1.0% in April. This suggests that business investment will remain buoyant in 2018, albeit not as strong as we had hoped. The gain follows a decline last month. The biggest disappointment so far have been the tax cuts, which do not appear to have shown up in investment plans.

The majority of the tax cuts are showing up in stock buybacks, repayment of debt, and mergers and acquisitions. Repatriation of profits has proven another hurdle for multinational firms. The taxes on those earnings must be paid in 2018. While firms have eight years to bring those earnings back to the U.S., some firms are lobbying Congress to get delays on paying those taxes. That seems unlikely given that the framers of the tax bill had hoped that taxes from repatriation would provide some offset to the hefty bill associated with the tax cuts.

Core capital goods shipments, which track actual business investment, rose 0.8% in April after contracting in March. That suggest solid if not spectacular growth in business investment in the second quarter. The estimate for second quarter growth was actually revised down, but mostly because of a shortfall in aircraft shipments not core capital goods shipments.

Separately, defense orders and shipments both picked up in April. This is notable because of the large increases in defense spending approved for the fiscal year 2018 budget. Defense spending will be a large contributor to growth in 2018, after being a laggard during much of the expansion. The fiscal year 2018 and 2019 budgets were not passed until March, which has compressed the time frame for those expenditures this year. The fiscal year ends September 30, 2018.

Bottom Line
Investment is coming back, but not as rapidly as we had hoped. We need to see more of a pick up in investment if we hope to meet the administration’s growth targets this year and boost productivity growth going forward.

About the author
Diane Swonk Diane Swonk
Chief economist
Twitter: @DianeSwonk

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