Core Durable Goods Orders Strong

Durable goods orders fell a less-than-expected 0.6% in May after upward revisions to April. A drop of 7% in orders for new commercial aircraft accounted for much of May's weakness. Orders for motor vehicles and parts fell as sales appeared to hit a peak. We saw fewer primary and fabricated metals orders last month following an increase in April. Some of the pullback likely reflected producers attempting to get ahead of tariffs and the resulting escalation in prices for steel and aluminum. Markets overshot the actual increase in steel and aluminum prices from tariffs alone. Higher costs are now undermining competitiveness in the rest of the manufacturing sector.

Core capital goods orders, excluding the volatile transportation and defense sectors, fell a more modest 0.2% in May following sharp upward revisions for April. Core durable goods orders, including machinery, are running more than 6% ahead of last year at this time. Business investment has rebounded substantially since mid-2017.

Core shipments slipped a negligible 0.1% in May after rising sharply in April. That suggests actual investment held up well during the quarter.

Separately, defense orders surged 15.1% in May, adding to an 8.8% rise in April. That underlines the push to spend appropriations for the fiscal year 2018 before the end of September. More than $150 billion in new federal spending was approved for fiscal years 2018 and 2019.

Real GDP growth is now expected to hit 4.5% in the second quarter with risks to the upside: 2018 is likely be the strongest year of this expansion.

Bottom Line
While uncertainty surrounding trade and tariffs is rising, it has not yet shown up in the data. The important word is "yet," which will depend heavily on trade policy.

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