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Aircraft Orders Lift Durable Goods

RFP
Durable goods orders jumped 2.3% in May after dropping 0.8% in April. A sharp 27.4% surge in aircraft orders drove overall gains. Orders for motor vehicles, a sector where a shortage of computer chips has taken a toll on production, were also up 2.1% for the month; that was after plummeting 8.1% in April. Orders excluding transportation equipment were up a more tepid 0.3% after posting a solid 1.7% gain in April.

Core capital goods orders, which strip out the volatile defense and aircraft categories, were essentially unchanged in May after jumping 2.7% in April. Vehicles, primary metals, communication equipment, electrical equipment, appliances and components drove the jump in core durable goods orders. We are still playing catch-up with back orders in everything from vehicles to appliances. Investment in existing technologies remains strong.

Core capital good shipments, which feed into current quarter GDP calculations for business investment, rose 0.9% after posting a solid 1% increase in April. That suggests another solid quarter of gains in business investment in the second quarter.

Separately, the third estimate of real GDP for the first quarter was released. The economy grew at a 6.4% pace in the first quarter, the same as was reported last month. Consumer spending, residential investment and business investment grew at a double-digit pace during the first quarter. Inventories were drained and the trade deficit deteriorated as COVID variants triggered lockdowns across much of Europe.

Today’s data suggests that business investment will remain strong but slow from the double-digit pace in the first quarter. Consumers will pick up the slack and continue to spend at a double-digit pace, with a shift in spending from big-ticket items for the home toward spending on services and nondurable goods.

Constraints on supply have left housing a drag on growth, while the trade deficit is expected to narrow. Inventories will begin to be replenished. The overall economy is still on track to post a double-digit gain for the second quarter.

Initial unemployment claims were 411,000 in the week ending June 19. That is lower compared to the previous week but still considered high. It is also despite widespread reports of labor shortages and a rollback in supplements to unemployment benefits across many states.

The recovery in employment remains uneven. We are not expecting to reach a million jobs created per month until schools reopen in the Fall. Special pandemic unemployment claims picked up during the week. Those include extensions for self-employed and gig workers. (People who quit their jobs cannot apply for regular unemployment insurance.)

The only really good news in the initial claims data was the continuing claims, which continued to trend lower in the week ending June 5. (Many people are no longer eligible for unemployment insurance.)

Bottom Line
Manufacturers are trying to catch up on backlogs built as we all focused on big-ticket items for our homes. That and the push to embrace technology are fueling gains in investment. Sadly, the labor market is still lagging, despite widespread reports of labor shortages. It was easier to bring back workers and turn the lights on a year ago than it is now, one year after the pandemic hit.

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Karen Nye
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