January durables weakness overstated by volatile aircraft
|Summary
The 6.1% drop in durable goods orders overstates the extent of weakness. Nondefense aircraft was almost entirely to blame for the drop in orders, and its impact on core shipments also likely overstates the downside risk to Q1 real equipment investment.
But I ain't got wings
The 6.1% plunge in January durable goods orders was almost entirely due to a slump in aircraft orders (chart). Specifically, nondefense aircraft orders fell 59%, or by $19.7 billion (chart). Motor vehicle & parts were also somewhat weak, with orders slipping 0.4%. But demand wasn't as weak as these headline figures suggest. When we exclude the broader transportation sector, orders fell a more modest 0.3% last month.
Transportation orders can be volatile month to month, which is why we often exclude them to get a clearer read of the current trend in demand, though they should not be completely ignored. When we consider the growth impact, transportation is a large part of the economy (accounting for ~33% of new orders), and it is factored into GDP estimates.
Aircraft orders are particularly volatile, and we would not be shocked to see a rebound here next month, which may offset some of this weakness at the start of the year. But continued pressure on shipments would dent broader growth.
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