First decline in a year has some people worried

For the first time in nearly a year there has been a slump in orders for American durable goods.

This unexpected decline last month in durable goods, which are regarded as items meant to last at least three years, has put a pause in the months-long manufacturing rebound that has been taking place since the COVID-19 pandemic. It has got some segments of the American corporate community worried.

The drop in overall durables was broad, including declines in bookings for motor vehicles, machinery and fabricated metals. Latest data from America’s Commerce Department yesterday showed orders for durable goods declined by 1.1 per cent from the prior month in January.

This is the first drop since April and comes after an upwardly revised 3.5 per cent gain in January. Core capital goods orders, a category that excludes aircraft and military hardware and dropped 0.8 per cent after an upwardly revised 0.6 per cent gain.

Commerce Department data findings

Core capital goods orders are seen as a barometer of business investment. The Commerce Department report also showed unfilled orders for durable goods rose 0.8 per cent in February, the most since September 2018.

Excluding transportation, durable goods orders declined 0.9 per cent, orders for motor vehicles and parts dropped 8.7 per cent, while shipments decreased 8.9 per cent amid severe weather and a shortage of semi-conductors. In addition, core capital goods orders increased an annualised 12.7 per cent in the three months through February, while shipments rose 13.4 per cent.

Even with the decline in durables orders, the US$254 billion value remains well above the year ago level, as inventories of durable goods rose 0.7 per cent in February after a 0.3 per cent decline a month earlier.

Temporary softening of rebound being exhibited

Some analysts are viewing the decline as a temporary softening in the rebound, which is being manifested across the nation’s factories since the pandemic slowed production and demand last year. However, production is still being restrained by shortages of some raw materials aided and abetted by supply chain disruptions that are driving up costs for manufacturers.

Other manufacturing data have been upbeat as the Institute for Supply Management manufacturing index hit a three-year high in February. This month’s regional Federal Reserve manufacturing gauges have upbeat expectations.

The Empire State general business conditions index rose to the highest level since November 2018, while the Philadelphia measure surged to the strongest since 1973. Orders for commercial aircraft surged more than 103 per cent in February from a month earlier as American plane manufacturer, Boeing reported 82 orders for the month, which is the second-best in two years.

At the same time, shipments of non-defense capital goods minus aircraft, fell one per cent in February, likely depressed by severe winter weather in the month.

Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc, told Bloomberg that, “the February results were suppressed by unusually harsh weather that substantially disrupted economic activity in much of the South and Midwest”.

She posited that “there also could be an element of ‘digestion’ at play after very rapid gains in preceding months”.

It is suspected that what is happening is that manufacturers are getting a tailwind from a gradual pickup in economic activity.