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Business Investment: Solid, not Spectacular

RFP
Durable goods orders rose 0.4% in April, after being revised down to a 0.6% increase in March. Orders excluding the volatile transportation sector edged only 0.3% higher. A slight bounceback in orders for new aircraft more than offset a drop in orders for motor vehicles and equipment. Boeing’s orders and deliveries are being suppressed due to problems with the 787 Dreamliner.

The vehicle industry has been focusing on deliveries to dealers instead of rental car companies. The margins are higher. Dealer markups hit a new record in early May, while incentives to sell to retail buyers continued to drop. Delays in tax refunds helped buoy retail vehicle sales in May, which siphoned supplies from fleet buyers.

Gains outside of aircraft were spread across primary metals, heavy machinery and defense. Primary metals orders grew in the face of war-related supply chain disruptions. Chip shortages are not as acute as they were late last year but are extremely volatile across industries. Domestic vehicle producers are partnering with chip producers to design chips that can be used for a multitude of purposes, instead of one function. The hope is to minimize downtime should chips become scarce.

Supply chain disruptions due to recent lockdowns in China are expected to hit retailers harder than manufacturers, at least initially. Retailers are currently worried about stocking for the back-to-school and holiday season, which starts with Halloween.

Defense orders were up slightly, but still weak. The spending associated with aid to Ukraine was not approved until May. That will show up later in the year.

Core durable goods orders, which strip out aircraft and defense and provide a better sense of underlying business demand, rose 0.3%. That marks a sharp slowdown from the upwardly revised 1.1% increase in March. The upward revisions are consistent with what we are hearing in the field; capital spending is coming in stronger than was being reflected in the government data.

Core durable goods shipments, which goes into the calculation of the real GDP figures, rose 0.8% in April. That marks an acceleration from the upwardly revised 0.2% pace in March. Again, heavy equipment producers are more optimistic than the data suggest.

Inventories came in slightly stronger than expected in the first quarter. This syncs with recent reports from Big Box retail discount chains. Consumers bought fewer home goods as they pivoted their from cocooning to traveling.

Bottom Line
Durable goods orders were a bit of a disappointment, while inventories appear to have risen. The net effect could show up as a slight upward revision to the GDP data, which will be released tomorrow. Overall growth contracted by about 1.25%; that weakness was heavily concentrated in trade. The war in Ukraine and lockdowns in China hit demand abroad harder than demand at home; exports contracted sharply. The three pillars of domestic demand (consumption, housing and business investment) actually accelerated in the first quarter.

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