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Durable Shipments Point to Solid Q1 Equipment Spending

Durable goods orders increased less than expected in March amid weakness in non-transportation items. Core capital goods orders posted a modest gain, while shipments point to solid rise in Q1 equipment spending.

Cooler Orders, but Recovery in Business Spending intact

Consistent with some of the softening that has begun to emerge in the survey data of the factory sector, growth in durable goods orders cooled in March. New orders rose 0.7 percent versus the market’s expectation for a 1.3 percent gain. That said, the weaker-than-expected outturn for March follows an upward revision to February. Orders for February were revised up from a 1.8 percent increase to a 2.3 percent gain.

As has been the case in recent months, transportation was a key source of strength, but due to the long lead time of aircraft orders. Nondefense aircraft orders rose by $941 million (+7.0 percent), while orders for defense aircraft increased by $1.0 billion (+26.1 percent).

Following the recent weakness in auto sales and production, new orders for motor vehicles and parts fell 0.8 percent, the second straight decline. Autos have been one of the strongest areas for orders over the expansion, but we do not expect it to provide much support in the coming months given the high levels of dealer inventories and weakening sales environment for new vehicles.

Excluding transportation, orders missed the mark by falling 0.2 percent versus expectations for a 0.4 percent gain. In addition, relative to the headline’s revisions, growth in February was revised up only 0.2 percentage points.

Nondefense capital goods orders excluding aircraft, our preferred bellwether of business equipment spending, rose 0.2 percent last month. Growth in core orders has slowed since the end of the last year, in part due to weaker orders for computers & electronics and machinery. Nevertheless, nondefense capital goods orders are running at a 6.0 percent three-month average annualized pace, compared to contracting as recently as this past summer. While that still looks sluggish relative to "soft" indicators on the factory sector, including the ISM manufacturing index, both the hard and soft data indicate a decent pace of expansion for manufacturing and business spending.

Q1 Equipment Spending Looks Solid

While orders were somewhat disappointing in March, shipments suggest business spending for the first quarter as a whole was solid. Nondefense shipments, a good guide of equipment spending, rose 1.3 percent last month. Real equipment spending has begun to claw its way back from the hole dug from late 2015 through most of last year, and today’s reading on shipments points to a strong increase in Q1 business spending in tomorrow’s GDP report. The slower pace of core capital goods orders, however, suggests a more moderate clip in Q2, but that business spending should continue to grow in the months ahead.

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