Weak Core Durable Goods Orders

Durable goods orders jumped 2.4% in December on a surge in aircraft defense orders, after a sharp downward revision for November. Orders excluding defense fell 2.5% in December after falling 0.5% in November.

Core durable goods orders, which exclude aircraft and defense orders and more closely track overall business plans, fell 0.9% in December. The biggest sources of weakness were computers and related equipment, machinery and motor vehicles. A bounce in vehicle orders following the GM strike was short-lived.

Core shipments excluding aircraft and defense fell a more moderate 0.4% during the month, which suggests ongoing weakness in business investment in the fourth quarter. That comes on the heels of data for the manufacturing sector by the Federal Reserve, which revealed that manufacturing slipped into a mild recession in 2019.

For the year, core durable goods orders edged up a meager 0.8%. Core shipments slowed to a 2% pace. The weakness in order books helps to explain the ongoing caution we are seeing in most surveys of CEO confidence, which first started to deteriorate as the trade war with China intensified in late 2018.

The hope is that the Phase One deal will stem the escalation of a trade war with China, at least for now. However, many manufacturers were disappointed that tariffs were not removed in the wake of the deal.

Worse yet, a new trade war seems to be brewing with Europe. The initial tariffs on vehicles and parts for national security reasons technically expired last October, but are still being used as a weapon in negotiations.

Congress has threatened to intervene on vehicles and parts tariffs given the blow they pose to the U.S. vehicle industry. Some large transplants have threatened to shut their U.S. plants permanently if the U.S. levies the tariffs it has threatened.

Bottom Line
Business plans and investment ended the year on a weak note. Manufacturers paid the largest price for trade wars and tariffs. We need more than a truce to lift the burdens they are shouldering.

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