New orders for core capital goods, a leading indicator of future economic growth, spiked in January, but the trend is unlikely to hold after Coronavirus hits supply chains in the coming months.
The Commerce Department said Thursday that businesses spent 1.1% more on orders of non-defense capital goods, excluding aircraft, in January than December.
Increased orders of core capital goods, items like machinery and computers, signify that businesses are confident in the economy and willing to invest. January’s investment jump could also be a pragmatic move by businesses to boost efficiency in light of low unemployment.
“The well will eventually go dry in terms of the number of workers they can hire, so basically businesses are searching for more ways to boost production,” said Robert Stein, Deputy Chief Economist, First Trust Portfolios, LP.
Regardless, increased orders for core capital goods are unlikely to continue. Thursday’s report doesn’t reflect Coronavirus’ disruption to American-Chinese supply chains and its impact on manufacturing. Rather, it highlights a glimmer of business confidence following the U.S.-China trade deal and a fall out in defense spending following a hefty December order.
“Remember, this is January. This is really pre-Coronavirus,” said Stein.
President Trump’s signing of the ‘Phase 1’ trade agreement mid-January, likely sparked an uptick in business investment. As part of the deal, China agreed to buy 50% more U.S.-based goods over the next 2 years. Several regional indexes that measure manufacturing’s business outlook showed booms after the ink dried. Philadelphia’s Federal Survey skirted a historical high.
However, investment surveys can vary greatly month-to-month. Coronavirus’s impact will have the final word on growth.
Looking forward, it’s possible Coronavirus’s hit to February financial markets could deter businesses from investing in big-ticket items, depressing new orders and factory production.
“Flying blind right now, based on what I see in the markets and the mild fear you see with normal citizens and Coronavirus, I would think durable goods orders would be down in February,” said Stein.
Despite the boost from core capital goods, total orders for durable goods dipped in January. Spending fell by 0.2%, a decline due largely to the volatile defense and transportation categories.
Orders of defense equipment dove 39.8% in January after a 87.4% surge the month before. Defense aircraft experienced even worse whiplash.
“Basically, we’re seeing the unwinding of a big defense aircraft order in December,” said Michael R. Englund, Chief Economist, Action Economics LLC.
Though Boeing reported no new orders in January, orders for civilian aircraft skyrocketed by 346.2%. The demand followed Boeing’s suspension of its 737 Max airliner. Still, Boeing’s production halt will hurt manufacturing, affecting both suppliers and furloughed workers.