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Durable Goods Cast Shadow on Q2 Business Spending

A four-month run of increasing durable goods orders ended with a smaller-than-expected decline in April. Softening core capital goods orders and shipments raise doubts about second quarter business spending.

Orders, Shipments and the Pirate’s Code

New orders for manufactured goods had increased for four consecutive months heading into today’s report. After such a hot streak, the consensus expectation was braced for 1.5 percent "payback" decline.

In the actual event, orders only fell 0.7 percent and the prior month’s gain was revised from a modest 0.9 percent increase to 2.3 percent. To sum up, durable goods orders have been running hot for four months and today’s giveback was smaller than expected.

As a general rule, orders tend to lead shipments. So, it becomes difficult to square this series of monthly gains in orders with the fact that shipments of durable goods fell another 0.3 percent in April, marking the third decline in shipments out of the past four months. To paraphrase Captain Barbossa, sometimes the relationship between orders and shipments is more of a guideline than a rule.

Fading Boost from Equipment Spending

In a separate release this morning, estimates for first quarter GDP growth were revised to show the overall growth rate was 1.2 percent, up from the initial estimate of just 0.7 percent. Equipment spending had been a drag on growth for three out of four quarters in 2016, but has increased in each of the past two quarters, albeit at a somewhat slower rate than first reported. The pace of equipment spending growth in Q1 was 7.2 percent, a pace that slackened from the initial estimate of 9.1 percent.

Today’s durable goods report gives us some clues as to how equipment spending is shaping up in the current quarter. Shipments of nondefense capital goods orders, ex-aircraft, or core capital goods, slipped 0.1 percent in April and the initially reported gain for March was slashed to a scant gain of just 0.2 percent.

Objects in the Rearview Mirror Are Smaller than They Appear

The March factory orders report showed a 0.5 percent increase in core capital goods orders, but today’s report revised away that gain. Core capital goods orders have now flat-lined for two months in a row. This is the most worrying dynamic in today’s report. This hard data suggest that the longoverdue rebound in the factory sector is delayed yet again.

Nonresidential business fixed investment spending added 1.3 percentage points to the overall GDP growth rate in Q1. That was the biggest boost to headline growth from this category in five years. A gradual firming in equipment spending is still our base-case forecast. However, the recent softening in both core capital goods orders as well as shipments raises doubts about the ability of this category to lend the same kind of support to GDP growth in the second quarter.

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