Durable goods is the latest in a string of February flops

Summary

The 1.1% drop in durable goods orders add to the disappointing slate of February data.While severe winter weather held down shipments last month, the manufacturing sectorremains plagued by ongoing supply chain bottlenecks, which is restraining new orders. If you are looking for a bright spot in orders, tilt your head up to the sky.

Another February flop

Durable goods orders fell 1.1% in February, even as January's gainwas revised higher. This upward revision to January and worse-than-expected February was also the case with two other marqueeeconomic indicators: retail sales and industrial production. Thereis more than just weather holding back activity, particularly formanufacturing where supply chain problems are getting worse, butnothing in today's report is enough to derail what we expect to be astrong rebound in business spending this year.

In fact, the drop in durable goods could have been worse. Aswe explain below, a rebound in aircraft orders was a key factorin preventing an even more disappointing headline print. Anumber of other categories were soft, suggesting perhaps theweather disruption refiected in the February industrial production report is also manifested here in durable goods orders. Old-line manufacturing categories were under pressure with primary metals, fabricated metals and machinery all lower after having been fiat orpositive in the prior month. More tech-focused businesses also saworders fall with declines in computers and electronics products aswell as communications equipment. As we describe below, this ismostly a function of getting critical inputs that have been dificultor impossible to source.

Expectations for today's headline print ranged from -4.6% to +5.5%,which speaks to the crosscurrents in manufacturing and the added complications of February's winter storms. Long lead times aretypical for some types of durable goods, aircraft being the bestexample, but the pandemic has resulted in slower supplier deliveriesand backlogged orders. These problems were only made worsewhen so much of the country was blanketed in snow or ice the wayit was for part of February. The fact that shipments tumbled 3.5%,more than three times the size of the decline in orders in February, refiects this dynamic as well. Shipments can be more susceptible than orders to weather disruptions.

Aircraft flying high again

There is a tendency to strip out aircraft orders when the monthlynumbers hit given their lumpiness and long lead times. That,however, would miss the infiection point in the aircraft sector atpresent. Nondefense aircraft orders and shipments rolled overmonths before COVID decimated travel due to the grounding ofwhat was Boeing's best-selling jet, the 737-MAX. Now with the MAX cleared to fly again in the United States and the end of the pandemic coming into view, aircraft orders are turning up again. In February, Boeing reported a total of 82 new orders, including 39 for the MAX. Factoring in cancellations, that is the first month ofpositive net orders by our calculations in more than a year. Whileal most every major category of durable goods orders fell lastmonth, the value of non defense aircraft orders soared 103%. Wesuspect the 21.7% drop in shipments was largely attributed toweather-related disruptions that hit other sectors. With orders recovering and airlines receiving MAX models again, we continueto expect aircraft will be a key driver of equipment spending andexports this year.

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