Durable Goods Orders Disappointed in February

Durable goods orders fell much more than expected in February, 2.2%, after three months of solid gains. A sharp drop in aircraft orders, which had been surging, accounted for the bulk of the weakness. There was also a bit of a slowdown in vehicle orders, which remained constrained by tight supplies. Virtually all the vehicles that can be delivered are being sold and not sitting in inventories. Orders excluding the volatile transportation sector dropped a smaller but more worrisome 0.6%, after advancing a 0.8% in January. Data for January were revised down slightly.

Defense orders were a major outlier, with a more than 60% surge in aircraft and parts. That was prior to the deal to trade Soviet-made fighter jets in Poland for U.S.-made fighter jets after Russia invaded Ukraine.

Core capital goods orders, which strip out the volatile defense and aircraft categories and offer a closer approximation to investment plans, fell a more tempered 0.3% during the month. Losses were fairly broad-based and hit everything from metals and heavy machinery to electronic equipment. Appliances and computers held up better during the month. Home builders and buyers are still waiting for appliances ordered last year to come in.

Energy prices, which are a major component of manufacturing activity, were climbing ahead of Russia’s invasion of Ukraine. Some small shale fields in the U.S. have increased investment but the major oil producers have been more disciplined in their production.

A new deal for the U.S. to alleviate the reliance of Europe on Russia will no doubt help that investment, but it takes time to ramp up fields. Saudi Arabia and The United Arab Emirates have the most spare capacity but they have been reluctant to boost supply and give up the windfall gains they are seeing in prices.

Separately, China instituted a new round of lockdowns in response to the spread of Ba2, a more contagious version of the Omicron virus. That could further muck up supply chains in March, although China is attempting to be more strategic in its closures of plants as that is critical to keeping their economy growing despite a real estate crisis.

Core capital goods shipments, which feed directly into the GDP calculations, rose a more solid 0.5% in February. The data for January were revised up sharply and suggest that even though orders missed their mark, the business sector will be adding to investment in the first quarter.

Bottom Line
Durable goods orders disappointed. A drop in aircraft orders accounted for the bulk but not all of that weakness. Shortages and higher energy prices still plague the manufacturing sector and are likely to intensify with the war in Ukraine.

Businesses are struggling to meet demand, a problem the Federal Reserve is finally attempting to rectify. Be careful what you wish for, as it is easier to destroy demand to meet supply than to lift supply to meet demand with rate hikes.

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