Upside surprise in durables looks more rebound than recovery

Summary

Durable goods orders came in better than expected in February, but strength was due to aircraft specifically, and the underlying orders trend remains weak as businesses are hesitant to invest amid increased economic uncertainty. A rebound in durable shipments, however, suggests equipment investment will be solid in the first quarter.

Businesses in holding pattern awaiting tariff clarity

Durable goods orders surprised to the upside in February. Despite the Bloomberg consensus of 59 forecasters looking for a 1% drop in orders, total orders rose 0.9% with some modest upward revisions to the previous month of data as well. This better-than-expected report can be mostly traced to aircraft orders specifically. Orders for defense aircraft popped 9.3%, and nondefense aircraft orders were down 'only' 5%. Separately released Boeing data suggested more downside risk from aircraft and point to strike effects still working their way through the data.

While some of the gain may signal a front-running of tariffs by businesses, we expect the strength more so reflects normal volatility and a rebound after some weak data. Consider orders for autos for instance, which bounced 4% in February after four consecutive monthly declines. The 2% gain in electrical equipment and 0.9% gain in fabricated metals orders also followed declines in January. Further, core capital goods orders (excluding defense & aircraft) fell 0.3% last month, signaling a bit of a weaker trend in underlying capital investment demand than implied by the headline growth rate.

Producers have, however, continued to churn out orders, reflected in strong durable shipments. Shipments were solid both in terms of overall shipments (+1.2%) and those of core capital goods (+0.9%). On a three-month annualized basis, core capital goods shipments are up 2.9%, which marks the fastest growth rate since 2020.

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