Details of March Durable Goods Orders Disappoint

Durable goods orders bounced back 4.0 percent in March, but the increase was primarily driven by aircraft orders. Ex-transportation orders were down 0.2 percent, with an even sharper decline in core capex orders.

Aircraft Distort Again

After declining in three of the past four months, durable goods orders came roaring back in March. New orders increased 4.0 percent, but details suggest weakness in the manufacturing sector remains pervasive.

As has been customary throughout the expansion, aircraft orders provided another sizeable boost to durable goods orders in March. Even though Boeing reported fewer aircraft orders for the month, the orders were for higher value models, leading to a 30.6 percent rise in nondefense aircraft orders. Defense orders also provided a noticeable lift to the headline, increasing 17 percent as a doubling in defense related aircraft outweighed weaker orders for non-aircraft defense items.

Excluding aircraft and defense orders, however, paints a more somber picture of the manufacturing sector. Core capital goods orders fell 0.5 percent in March, the seventh consecutive monthly drop. The string of losses is not unprecedented during an expansion—core orders fell for seven straight months in the middle of 2012—but does illustrate the headwinds facing producers given the falloff in mining investment and stiffer competition from overseas following the surge in the dollar’s value over the past year. Four out of the six major categories posted declines in March, led by another decline in machinery orders which are down 12.2 percent over the past year. Motor vehicles remain one of the few bright spots in manufacturing, with orders up 5.4 percent in March and 13.0 percent from a year earlier.

Equipment Spending Not Thawing Fast Enough

After falling in January and February, shipments bounced back 1.1 percent in March. The rebound suggests that the negative effects from tough winter weather and the West Coast port strikes are fading. However, core capex shipments were down again in March. At face value, the 2.2 percent annualized decline over the past three months indicates a disappointing turnout for equipment spending in the first quarter. Inventories at least appear to be in better balance with the more modest pace of sales; the inventory-to-shipments ratio fell back to 1.67 from 1.69 in February.

Along with continued headwinds from the strong dollar, the purchasing managers indexes released thus far for April indicate there will be no quick turnaround in the manufacturing sector. The Kansas City and New York Federal Reserve Banks indicate activity contracted in their regions in April, while activity in the Philadelphia Fed region expanded at only a slow pace. We expect shipments and therefore capital spending to improve in the current quarter as weather effects and supply bottlenecks related to the West Coast port strike fade, but for the pace of spending to remain rather modest.