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Core Orders Surge

RFP
Durable goods orders rose 0.8% in March after falling a less-than-initially reported 1.7% in February. A drop in aircraft orders held down overall orders. Boeing announced that the war in Ukraine sidelined more than 140 orders for the year in early April, while China has yet to clear the 737 Max to fly.

Orders for motor vehicles and equipment surged 5% during the month, buoyed by a surge in demand for rental car fleets. Demand for rental cars has come back with travel and tourism, while supply chain bottlenecks have at least temporarily eased. Taiwan, which has a chokehold on computer chips, weathered the Omicron wave much better than mainland China. Shanghai kept its ports open to try and minimize the effects of lockdowns. We may not feel the full effects of factory closings and logistical problems out of China until well into the second quarter.

Defense aircraft orders are expected to rebound later this year in response to aid the U.S. has promised to Ukraine. The U.S. is also helping swap out inventories for Russian-made jets in Eastern Europe to free up planes for Ukrainian fighter jet pilots; they were trained on Russian-made planes.

Core durable goods orders, which strip out aircraft and defense orders, surged 1% in March after contracting an unrevised 0.3% in February. Gains in orders outside of aircraft were broad-based in everything from metals to manufacturing equipment and computers and electronic products. The surge in communications equipment was 7%, even as shipments plummeted. That likely reflected plant closures in China. Smartphone plants were among the first to be hit by the most recent round of lockdowns in China.

The orders data suggest that business investment started the second quarter with a bit of a tailwind. The risk is that higher interest rates and supply chain disruptions from China could start to become more of a headwind for investment as we move into summer. Rates have already risen markedly in anticipation of an aggressive rate hiking cycle by the Federal Reserve.

Core durable goods shipments, which feed directly into real GDP growth, rose a more tepid 0.2%, the same as we saw in February. In response, business investment is expected to slow in the first quarter from the rapid pace of the fourth quarter. Orders suggest those gains could be stronger in the second quarter.

Bottom Line
The strength in core orders was welcome news in a highly uncertain environment. Shipments were not as strong and do not alter our estimate that real GDP growth essentially flatlined in the first quarter.

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