Durable Goods Orders Disappoint

Durable goods orders rose just 0.5% in March, about half of what most were expecting. The disappointment followed the first contraction in orders for big-ticket capital goods in nine months.

A sharp slowdown in aircraft orders, which dropped by nearly 50% during the month, accounted for much of the weakness that we saw in March. Defense orders also fell. Aircraft orders had been improving with a pick-up in leisure travel and the return of the Boeing 737 Max, but that plane has suffered yet another safety setback, which could take a toll on orders and deliveries in April.

Vehicle orders snapped back in March following weather delays and bottlenecks in the supply chain for computer chips earlier in the year. Unusually harsh winter weather and widespread power outages across the oil patch compounded production delays during February.

Core capital goods orders, which strip out the volatile aircraft and defense orders and more closely track business plans, rose a stronger 0.9% in March. That follows a drop in February. Gains were strongest in vehicles, which continue to benefit from the shift to working from home and the aversion to mass transit - communications equipment, metals and machinery. We were still up a stunning 10.4% in the first quarter from a year ago in March.

Core durable goods shipments, which feed directly into the GDP figures for business investment, jumped 1.3% in March after contracting in February but less than expected. The beaching of the Ever Given, a ship the size of the Eiffel Tower, in the Suez Canal compounded delays in the supply chain. Core shipments rose 9% in the first quarter from a year ago in March.

The biggest laggard in the overall GDP measures is consumer spending on services, not goods. The overall economy is on track to finally hit the peak reached in the fourth quarter of 2019 in the second quarter of 2021. Employment will take much longer to reach its previous peak.

Bottom Line
Bottlenecks in the supply chain are the primary reason for the less-than-stellar performance of durable goods orders and shipments in March. That will not stop the economy from more fully healing as we move through the year. A pivot in consumer demand from a focus on goods to services, added to catch-up on earlier shortfalls, suggests the bottlenecks will dissipate as we move into the second half of the year.

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