Durable goods orders increased in January showing the economy’s resilience, despite global supply chain snafus and the third year of the COVID-19 pandemic approaching.
New orders for durable goods – products that last for three years or more – rose 1.6 percent. This is the eighth increase over the last nine months.
The unexpectedly strong durable goods report follows a series of other signs that the economy was not derailed by the rising cases as a result of the Omicron variant. Personal consumption expenditures increased 2.1 percent, or $337.2 billion, of which $285.4 billion was spent on goods. Of the 467,000 jobs that were added in January only 14 were in durable goods.
Inflation, labor shortages and personal consumption spending are in a tug of war with durable goods orders, making the continuous rise in demand hard to maintain.
“I think of inflation as being a reflection of the lack of supply,” said Jimmy Jean, vice president and chief economist & strategist at Desjardins Securities Inc. “New orders are more likely to influence inflation as opposed to the other way around.”
The continued rise in orders is likely to spur investments, which would provide another boost to the economy. Unfilled orders for durable goods have risen for twelve straight months which suggests that there will be no slow down in the near future.
“This is an excess demand economy. There’s not enough supply to meet demand,” said Aneta Markowska, managing director and chief US financial economist at Jefferies. “The only way to close that gap is through more investments.”
Durable goods orders tend to trickle into other parts of the economy that rely on those shipments though. While orders and the capacity utilization rate – which measures how much of a business’s potential output is versus its actual output – have steadily risen, much of the country is still awaiting unfilled orders.
“We’re at a point where you still have a lot of key critical inputs that are missing in many industries and they’re being held back at ports and upstream in the supply chain,” Jean said.
Since the start of the pandemic, labor shortages also have become an issue. As the economy began to recover, workers did not return to the job market causing a lapse in the capacity utilization rates and straining businesses ability to meet demand on top of supply chain issues.
“When we talk about the labor shortages and the demand it’s creating for things like automation, I think that’s going to remain sustained,” Jean said.
In order to meet consumer demand or to make automated robots to assist in production, businesses must find ways to get workers to return to manufacturing jobs, amongst other industries that rely on labor to move products, or find another way to reduce exposure to risks of bottlenecks and long supply chains.
“The more supply we get, the more it will help cool inflation and that’s very important,” Jean said.