Pre-COVID Jump in Durable Goods Orders

Durable goods orders jumped 1.2% in February, marking a fourth increase in five months. Almost all of that increase was concentrated in motor vehicles and parts. We saw a pre-COVID-19 spike in orders when GM was still rebuilding inventories lost to the 6-week strike it endured in October and November; those inventories are no longer needed. Plants have been shuttered to avoid the spread of COVID-19 among workers.

Durable goods orders excluding the transportation sector fell 0.6% in February and are expected to fall precipitously in March and during the second quarter as the toll mounts. The blow to the electronics industry - computers and cellphones - is not fully reflected in the data and is likely even greater than the initial cut of this data suggests.

Core durable goods orders (excluding aircraft and defense orders) fell 0.8% in February. Supply chain disruptions had begun in February, while concerns were growing about what country closures would mean for exports.

Core durable goods shipments, which reflect current quarter business investment, dropped 0.7% as problems associated with COVID-19 emerged. Orders were slowing both domestically and from abroad. That is the tip of the iceberg. Aircraft orders are way off as well. Boeing’s 737 Max, which was expected to add to growth later this year, may not come back at all given the devastation to the airline industry, even after bailouts.

Separately, defense orders bounced back after a dismal January. This is an area that was funded well before the crisis but can’t begin to compensate for the growing losses we are incurring and will reveal themselves in the data going forward.

Bottom Line
The durable goods data is not as good as the headline data suggest. Losses will compound rapidly in the data for March and April. What we are living with COVID-19 will show up with a lag in the data. The gap between what we know and what we can see in the data has never been so large due to the sudden, stop-gap nature of containment measures.

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