Durable Goods Order Surge in March

Durable goods orders surged 2.7% in March, nearly triple market expectations, after being revised up for the month of February. A 31% surge in aircraft orders contributed to the gains. That begs the question of when the cancelations and production lost to problems with the Boeing 737 Max will show up.

Motor vehicle orders rose 2% along with shipments last month. The bounce followed several weak months as retail spending on motor vehicles and parts has slipped from a peak in 2017. Most of the gains we are seeing now are tied to replacement demand. The vehicle makers have been surprised by the weakness of car over SUV sales. This is one of many reasons GM decided to shut its Lordstown Ohio plant in March, which produced the compact Chevy Cruze.

Core durable goods orders, which strip out volatile aircraft and defense orders, also surprised to the upside with a solid 1.3% gain. That was the strongest advance in 8 months. A rebound in communications equipment drove those gains. Fabricated and primary metals all lost ground over the month. So much for tariffs helping the manufacturing sector.

Core shipments fell 0.2% but off upward revisions, which suggests slightly more business investment during the quarter. Overall gains in investment are still weak.

There was a worrisome buildup in inventories, which will add to the estimate of first quarter growth but at the price of growth later in the year. Gains were broad-based, including aircraft, which will also be a drag on growth.

Separately, orders for defense picked up after a lull due to the government shutdown in January. Again, aircraft orders drive those gains. That will show up in government spending in the first quarter. Fiscal years 2018 and 2019 included large spending increases for defense.

The fiscal year 2020 budget is behind schedule due to the government shutdown, with large divisions emerging both within and across party lines. The president’s demand for a wall is getting the most pushback. Republicans wouldn’t allocate as much as he wanted when they were in the majority in the House of Representatives; now there is disagreement over an infrastructure bill. The concern is still high that we don’t come to an agreement on the fiscal year 2020 budget, which starts October 1. That would be more the norm for Congress in recent years, despite the desire to juice growth in an election year.

Bottom Line
The orders, shipments and inventory data represented a welcome surprise and will further boost growth in the first quarter. Some estimates are now close to 3% for the quarter. We are closer to 2.5%. Not all gains were for the right reason. Bloated inventories are expected to suppress manufacturing activity along with disruptions at Boeing, which has announced some breaks in production to sort through concerns about the 737 planes. Prospects for growth in the second quarter have now fallen well below 2%.

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