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Polar Vortex Slammed Durables

RFP
Orders for durable goods orders plummeted 1.1% in February after rising an upwardly revised 3.5% in January. Unusually harsh winter weather across the South and the oil patch took a toll on manufacturing activity during the month, delaying shipments into March. Aircraft orders more than doubled but are still coming back from safety issues with the Boeing 737 Max in 2019 and the pandemic. Aircraft orders are still off at a double-digit rate from already suppressed levels a year ago.

Core durable goods orders, which strip out defense and volatile aircraft orders and feed directly into the GDP calculations, dropped 0.8% for the month. That offset a slightly stronger-than-initially reported rise of 0.6% in January. Losses were broad-based. The largest declines outside of defense occurred in motor vehicles, which are suffering from supply chain disruptions. Computer chips have become scarce and forced production cuts in addition to the harsh weather. That is despite strong demand. Many dealer lots have hit record lows on their inventories, which have pushed up prices.

Rental car fleets have dwindled to nearly nothing, which is pushing up prices on rental cars. Federal Reserve President Tom Barkin told an audience he recently paid $300 a day for a rental, when discussing the kind of transitory inflation flare we could see in response to reopening the economy. Those costs will come down once current bottlenecks are resolved and the rental car companies replenish their fleets. The greatest demand for rental cars was for business travel before the pandemic, which is expected to come back more slowly than leisure travel over the summer. Core orders overall are still up 8.5% from a year ago even after weather-related losses in February.

Core shipments fell by 1% as electricity outages and weather shut down plants. That follows an upwardly revised increase of 1.9% in January. Core shipments were still up 7.3% from a year ago in February.

Look for a large rebound In March. A recent survey of CFOs by the Federal Reserve and Duke University revealed that half were using or planning to use automation to replace workers as the economy reopens. That is just one of many reasons that the Fed is more cautious than the bond market in waiting for employment to come back.

In fact, investment in computers, related products and communications equipment are driving the year-over-year gains in new orders and shipments. Both categories are up at a double-digit pace from a year ago despite losing ground from January in February. Trends accelerated by the pandemic, including the move to online retail and working from home, are expected to persist after the pandemic has subsided. That and the loss of many small businesses have left the Fed more concerned about the recovery in employment than many on Wall Street; small businesses accounted for much of the jobs rebound in May and June last year.

Bottom Line
Unusually harsh winter weather took an outsize toll on durable goods orders and shipments in February. We expect to see a nice rebound as we get into the spring spring but those gains via automation could end up displacing more of the workers who were already hardest hit by the pandemic.

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Karen Nye
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