Recovery Persists in Manufacturing

Durable goods orders jumped 1.9% in September after rising only 0.4% in August. A jump in orders for transportation equipment, including nondefense aircraft, which had plummeted dramatically this year, accounted for more than half of those gains. Motor vehicles and equipment were also up at a healthy clip after contracting in August. Sales of new vehicles have come back faster than many anticipated, and dealer inventories are low. Spending on luxury vehicles and replacement demand in the wake of recent fires and flooding have helped overall sales.

Core capital goods, excluding the volatile aircraft and defense categories, rose 1%, which is still solid but a slowdown from the more than 2% pace we saw in July and August. The largest gains were in motor vehicles and related primary and fabricated metals. The largest losses were in computers and related equipment, which surged as more than a third of the labor force shifted to work-from-home to mitigate contagion from the coronavirus.

Shipments rose only 0.3% in September after contracting by a like amount in August. Core shipments, which feed directly into business investment in the GDP calculation for the third quarter, which is due out Thursday, edged 0.3% higher in September after rising at a much faster pace in July and August. Gains in communications equipment outside of computers and motor vehicles were tempered by broad-based weakness in manufacturing, metals, heavy machinery and computers. Supply chain disruptions are hurting the broader rebound in manufacturing activity.

Core orders and shipments are both still in the red compared to a year ago. Business investment was tepid in 2019 prior to the COVID crisis. The trade war with China is the primary reason for that earlier weakness. This was supposed to be the year that investment and manufacturing more broadly returned.

Bottom Line
Business investment will rebound and add to a record-breaking 30% plus pace of annualized real GDP growth in the third quarter. Those gains will not be enough to get us out of the hole dug by COVID. Momentum in business investment is slowing while the risks of another downturn are rising. A surge in COVID cases in both the U.S. and Europe could take a toll on business investment in the fourth quarter.

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