The first durable good orders report for 2017 showed an overall increase, but the uptick is largely due to large commercial and military aircraft orders and increased consumer spending.
Durable goods are products intended to last at least three years. Of these goods, ransportation and defense goods are the most volatile factors, in that one order can have a massive effect on the overall.
January’s 1.8 percent increase comes after two months of decreases. The number was inflated by a 69.9 percent increase in new orders for commercial aircraft and a 59.9 percent increase in new orders for military aircraft. Excluding transportation, the durable good orders actually decreased by .2.
The increase slightly exceeded the consensus estimate of 1.6%, according to a Bloomberg survey of 16 economists. The survey showed estimates ranging from a .5 decrease to a 3.2 increase.
The report spotlighted several promising factors for factory activity, said Russ Price, the senior economist at Ameriprise Financial Inc. who was on the high-end of this range.
“In general manufacturers have been reporting stronger demand, so that’s a good prospect for durable good orders for the month of January as well as the outlook going forward,” Price said before the report came out.
Transportation also takes into account automobile manufacturing, which points to consumer confidence. New orders on motor vehicles and parts are up, and motor vehicle inventories have gone down, meaning consumers are spending.
“Capital spending wasn’t necessarily horrible, but now appears to be picking up. It’s a good sign for the economy but the consumer accounts for 70% of the overall demand,” said Scott Brown, who is a senior vice president and chief economist at Raymond James Financial. Consumer confidence is crucial in that it leads to increased spending, increased productivity, and more jobs.
Excluding both transportation and defense – a metric used by businesses investors in determining economic health – the number decreased by .4 from December. This is the first time this number, which increased by a revised 1.1 percent the month before, has seen a decrease since September.
But economists warn investors to pay more attention to the overall trend.
“I think many investors will tend to put too much weight on any one particular month,” said Brown. “The trends here are still very much positive.”
Price said January’s negative swing of this metric could have to do with uncertainty about how much President Trump will roll back regulations that businesses consider onerous. “There is a little bit of uncertainty right now about the fiscal policy, so it may benefit some companies to take a wait-and-see attitude,” he said.
In addition to his change to business regulations, President Trump’s plans to renegotiate NAFTA and to invest $1 trillion in infrastructure could increase the demand for new orders domestically. This would have positive, more dramatic effects on future durable good reports.
Stabilizing gas prices and an increase in spending on vehicles and auto parts are a positive sign for the economy and future durable goods numbers. Business investments are expected to increase through the course of the year in response.