Durable goods orders plummeted 1.1% in September. Losses were concentrated in transportation equipment, fabricated metals and losses associated with the GM strike, which exacerbated weakness associated with tariffs and slower global growth. Nondefense aircraft orders continued to fall as Boeing’s struggles with the 737 Max worsened.
Orders excluding the volatile transportation equipment category fell a more modest 0.3% in September after rising in both August and July. Defense orders also fell in September after surging in August.
Core durable goods orders, which exclude the volatile aircraft and defense categories and provide a better look into investment plans, fell 0.5% in September. That follows a 0.6% drop in August and no change in July. Business investment has been hit hardest by the uncertainty surrounding the trade war, escalating tariffs and weaker growth abroad. The GM strike further undermined activity in September. I spoke to one manufacturer who told me senior management is now spending 20-25% of their time trying to figure out how to mute the costs of tariffs instead of planning for the future. The GM strike has only added to those pains.
Shipments also fell again in September. The drops in motor vehicles and parts and aircraft were the largest. Core shipments, which go into the calculation of business investment for the third quarter also plummeted. This suggests another quarterly contraction in business investment for the third quarter. Worse yet, some of those losses will be carried into the fourth quarter, given the length of the strike at GM.
The manufacturing sector is not expected to recoup all that was lost to the GM strike until well into the first quarter of 2020. We have already lost five weeks of production at GM, without including the spillover effects on suppliers. Some service providers in the areas affected will never recoup what was lost.
The Federal Reserve tends to look through the losses triggered by strikes as they have little to do with underlying economic fundamentals. That said, the timing of the strike couldn’t be worse given the losses we were already experiencing due to trade wars and weakness abroad. My one preference is that the Fed stays on the sidelines at the meeting in October, but it will be tough to stand pat in the wake of a bad GDP report, which looks like it just got worse for the quarter.
Business investment was weak ahead of the GM strike and has only worsened since. Trade wars are costly.
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