Durable goods orders jumped 1.7% in June following small, upward revisions to May. More than half of the surge came from a sharp increase in transportation orders; vehicle orders and shipments were strong after plummeting in May. At least a portion of that rebound in orders may be attributed to stockpiling ahead of potential tariffs. Vehicle makers increased shipments to the U.S. to get ahead of any new tariffs. There are limits to how much hedging producers can engage in, considering the limited storage for imported parts and vehicles. We shifted to a just-in-time world decades ago.
There is some hope that vehicle tariffs by the U.S. may be avoided after the meeting the president had with the head of the European Commission on Wednesday. It is notable, however, that vehicle tariffs were not included in the apparent “cease fire” on trade. It is unclear if member states can be convinced to agree to concessions offered up by the Commissioner. Europe already has an excess supply of soybeans and natural gas so governments will feel pushback.
Core capital goods, the best indicator of actual business plans, increased a much more moderate 0.6%. Shipments rose 1%, which points to solid gains in business investment for the second quarter. Defense orders for aircraft rose at a 20.2% pace, reflecting the federal government’s need to spend its 2018 budget before the start of the new fiscal year in October. Other defense durable goods orders declined after a sharp increase during the previous two months. Federal spending will continue to add to growth since Congress opened the spigots to large spending increases.
Bottom Line
Business investment remains solid if not spectacular. Tax cuts have not yet shown up in investment but distortions from tariffs are beginning to appear. The hope is that the truce between the U.S. and the EU will allow time for negotiators to get to the table. Trade policy, however, is incredibly complex and can take much longer than most anticipate. That means an extended ceasefire would be needed to get where we want to be: a world with lower, not higher, tariffs.
Copyright © 2018 Diane Swonk – All rights reserved. The information provided herein is believed to be obtained from sources deemed to be accurate, timely and reliable. However, no assurance is given in that respect. The reader should not rely on this information in making economic, financial, investment or any other decisions. This communication does not constitute an offer or solicitation, or solicitation of any offer to buy or sell any security, investment or other product. Likewise, this communication serves to provide certain opinions on current market conditions, economic policy or trends and is not a recommendation to engage in, or refrain from engaging, in a particular course of action.
