Businesses Skittish in April

Durable goods orders dropped by 2.1% in April, after being revised down for the month of March. Aircraft orders, which suffered a blow by cancellations for the 737 Max at Boeing, saw the largest declines. Orders for motor vehicles and parts also contracted. Vehicle sales have weakened significantly over the last year; sales peaked in 2017.

Core durable goods orders, which exclude volatile aircraft and defense orders and more closely track actual plans to invest, dropped 0.9% in April. That more than offset a small gain in March and suggests continued caution by large producers. A drop in orders for primary metals and communications equipment only partially offset a sharp increase in orders for computers and related products. The latter category includes cell phones, which will be hit hard by the next round of tariffs on China. The administration actually allowed firms to get shipments on the water before those tariffs went into effect; it appears they made it to shore, as shipments of computers also picked up substantially during the month.

Core capital goods shipments flatlined in April after contracting in March. That puts them below the level hit at the end of the first quarter and suggests another dismal quarter for business investment. Businesses are still struggling with an overhang of inventories accumulated over the last three quarters and a sharp slowdown in the global economy.

Many were hopeful those trends would reverse in the second half of the year. Prospects are now doubtful, given the escalation of tensions between the world’s two largest economies - the US and China. This risk of contagion from a slowdown in China is particularly high, given the tentacles it has in most other economies.

Bottom Line

Businesses are showing caution when we usually see confidence in their decision making. Tariffs and the threat of a full-scale trade war with China have the power to undo the euphoria over corporate tax cuts in 2018.