Durable Goods Orders Lag Expectations

Durable goods orders rose 0.8% in June after being revised up for the month of May. A surge in orders for civilian and defense aircraft drove overall gains. The civilian aircraft industry has been struggling to recover since Boeing’s 737 Max was grounded prior to the pandemic and then the cessation in air travel triggered by the pandemic. Domestic leisure travel has largely recovered, while international and business travel are still lagging.

Core durable goods orders, which strip out aircraft and defense, rose a more moderate 0.5% in June and were revised up nicely for May. These data points provide insight into businesses’ plans for investment in the third quarter. Continued strength in computers and electronics offset a small drop in orders in the vehicle sector, which has suffered some of the biggest supply-chain problems due to a shortage of computer chips.

Taiwan, the world’s largest chip manufacturer, was forced to idle production in response to a fifty-year drought and a surge in Delta variant infections. Water, which is a key ingredient in the chip manufacturing process, was rationed while Delta outbreaks forced some plants to temporarily close.

It is notable that motor vehicle and parts orders still gained nearly 30% from a year ago. Orders for electrical equipment and appliances, which are also suffering from delays in chip production, were flat for June but still up more than 17% from a year ago. Surging prices for new and used vehicles have tempered consumers' attitudes toward big-ticket items in recent months as they shift spending to services.

Core durable goods shipments, which feed directly into the monthly GDP statistics, rose 0.6% in June while May was revised up to nearly 1%. The data suggest that large companies that benefited from government stimulus and the pivot to goods spending during the pandemic were still investing at a robust clip in the second quarter. The acceleration in technology investments since last year has been the fastest since the tech bubble and leapfrog investments spurred by Y2K preparations in the late 1990s. (Google Y2K.)

The boom in technology investments suggests that the productivity growth associated with the adoption of existing technologies could be more broad-based than it was prior to the crisis. That is helping to cushion the blow to margins associated with higher input costs, including wages. CEO wages have far outpaced inflation and the rise in wages of rank-and-file employees. However, many smaller mom and pop shops are taking it on the chin and finding it even harder to hire and compete with larger competitors as the economy reopens.

Bottom Line
Business investment disappointed in June and barely expanded in the second quarter but orders suggest it will pick up substantially over the summer. The largest hurdles are supply chain bottlenecks and uncertainty triggered by the spread of the Delta variant.

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