Durable goods orders fell 1.3% in May after following a downward revision to a 2.8% drop in April. A fall in orders in the aircraft sector, driven by safety concerns surrounding Boeing's 737 Max, accounted for much of that weakness. Orders at the Paris air show suggest that we will see a modest bounceback in those orders next month. Boeing has yet to resolve all the concerns surrounding the plane.

Defense orders were also weak in May after posting two stellar months of gains. The defense budget got a lift in fiscal years 2018 and 2019 once Congress finally agreed upon a budget in February 2018; social spending also got a boost then. The House of Representatives has been scrambling to pass as many appropriations bills as possible before Congress takes a break this summer; spending bills have yet to pass the Senate. The real hurdle will be the need to raise the debt ceiling while Congress tries to finish negotiations on the fiscal year 2020 budget. Treasury currently expects its extraordinary measures to keep debt issuance below the existing debt ceiling to run out in October or November.

Core capital goods orders, which track business plans, rose 0.4% in May after contracting by 1% in April. Gains in motor vehicles and parts, communications equipment, machinery and primary metals more than offset a drop in computers and electrical equipment and appliances, Those figures, coupled with a 0.7% gain in shipments, suggest that business investment is weak but still positive in the second quarter.

More worrisome is a persistent rise in inventories. Those gains could help second quarter growth get close to the 2% threshold but for the wrong reason. Inventories have been rising since mid 2018 as firms struggle with weaker growth, mostly abroad

Bottom Line

Today’s data do nothing to reassure the Federal Reserve that confidence in the business sector is coming back in a meaningful way. Equity markets have been consistently more bullish on the prospects for a ceasefire in the trade war than those on the front lines. Treasury Secretary Steven Mnuchin has expressed optimism about the G20 meetings. We hope he is right; the costs of trade wars are beginning to compound.