Durable goods orders increased strongly in January highlighting a growing optimism in the economy’s recovery as President Biden’s $1.9 trillion stimulus bill advances and more people become vaccinated.
New orders for durable goods – items with a life expectancy of at least three years like cars and computers – increased 3.4%, according to the Department of Commerce. This is the highest increase in new orders since July 2020.
New orders for core capital goods, widely considered the best leading indicator of business investment spending, rose 0.5% from December. Shipments rose 2.1% during the same time period. Both indicate that businesses are ramping up their spending in preparation for an economy that is heating up.
“The fact that we keep seeing this nice string of gains in core orders and along with the upward revision to the prior month I think is very encouraging,” said Jennifer Lee, senior economist at BMO Capital Markets.
While the momentum behind durable goods orders has been strong, it may falter when the economy reopens in full. Consumer spending patterns will shift from goods to services such as restaurants and events.
Most economists underestimated January’s growth in part due to the volatility of transportation orders. New orders for nondefense aircraft and parts shot up close to 390%. Despite its volatility, some believe transportation will continue to pick up – especially now that Boeing’s 737 MAX has been cleared to fly again.
“It was very encouraging to see that the transportation orders, particularly the aircraft orders, rose last month,” said Oren Klachkin, lead U.S. economist at Oxford Economics.
Other bright spots in the report are durable goods related to defense and motor vehicles. New orders for defense capital goods surged slightly over 20% in January. Shipments and new orders for motor vehicles and parts fell 1.0% and 0.8%, respectively. This was a modest decline considering the global semiconductor shortage that has caused significant setbacks in the auto industry.
The spike in defense can be chalked up to the spending package passed by Congress in December to provide pandemic relief and federal spending, which included nearly $700 billion for the Pentagon, said Russell T. Price, senior economist at Ameriprise Financial. He said the budget being approved gave a green light for new orders related to defense to go through since the money had been appropriated, but he expects it to decline in the coming months.
As most people have been confined to their homes since the start of the pandemic, their spending shifted with the times. But once the virus is contained and consumers feel that things have reverted back to normal, their spending patterns will soon reflect this.
Restaurants will once again be able to operate without any restrictions and people who have largely dined at home will be consistently streaming back in. Travel will also gain steam as people once again feel comfortable moving across borders by land, air and sea. Attending venues such as theaters, museums and sports arenas will once again become commonplace.
But until then, durable goods orders will continue to play a sizable role in the economy’s faster than expected recovery.
“The outlook for manufacturing remains quite strong outside of an unexpected resurgence in the virus,” said Price.