Durable goods give mixed picture of US economy as defense orders surge

• Defense department procurement rises sharply in December.
• Business spending falls and is down for the second half.
• China’s health crisis may delay trade deal implementation.

Orders for durable goods jumped in December as defense purchases rose sharply but business investment in the private sector declined for the third time in the last six months, reported the Commerce Department on Tuesday.

Goods designed to last three years or more in normal use climbed 2.4% last month, far more than the 0.5% forecast, but November’s total was adjusted to -3.1% from -2.0%.   The December gain was propelled by a 90.2% increase in purchases of military equipment which reversed their steep November decline.  

Durable Goods Orders

FXStreet

Congress passed a number of spending bills in December which included an increase in the military budget.

Non-defense capital goods excluding aircraft, the proxy business spending category, dropped 0.9% on expectations for a flat result. The November figures was unrevised at 0.1%.  The monthly average for the second half is -0.133%.  These orders fell 1.5% in 2019 in contrast with the 0.8% gain the previous year.

Non-Defense Capital Goods ex-Aircraft

FXStreet

The China trade deal signed on January 15^th in Washington is designed to promote American agricultural exports to the mainland and encourage export orders for US factories. Even though the agreement was pending in December any positive impact was not expected until the first quarter after the terms were examined by businesses and China began compliance.   The virus health crisis in China may delay its effective implementation.

New orders excluding defense procurement were down 2.5%, much worse than the 0.5% forecast and the November figure was revised steeply lower to -0.5% from 0.8%.

Purchases of transportation equipment rose 7.6% driven by a 168% climb in orders for military aircraft. Placements for civilian airplanes declined 75% as the largest American manufacturer, Boeing Company of Chicago, continued to suffer from the grounding of its 737 MAX liner.  Automobile orders slipped almost 1%.

Outside of the transport sector, that is primarily without aircraft and cars, orders fell 0.1% following November’s revised -0.4% initially issued as flat.

Markets were little changed after the durable goods report. The dollar was trading at 1.1010 against the euro in late morning at a two month high largely on risk aversion from the China health crisis.  The yen was at 109.15, about 30 points higher on the day but down from 110.29 on the 17^th  also on the China issue.  Both the Japanese yen and the US dollar historically serve as a safe havens in the currency markets.

The generic 10-year Treasury was yielding 1.65%, up 4 points on Tuesday, but off from 1.82% on the 20th.