Purchases for most types of manufactured goods increased in January, an unexpected sign that the economy is still strong.

Orders for core durable goods–long-lasting manufactured products, excluding transportation equipment–increased 0.7% in January. Total orders fell 4.5%, mostly due to a large aircraft order in December.

The data indicate an economy with strong demand and few indications of a looming recession. Increased orders for equipment and machinery suggest that businesses plan to keep busy in the coming months.  But if the economy continues to outperform, economists expect the Federal Reserve to continue raising interest rates in an effort to slow the economy and reduce price pressure.

Orders for computers, electrical equipment, and primary metals all increased from December. New orders for capital goods rose 0.8%, excluding defense and aircraft, in the largest percentage increase since August. Shipments also rose, by 1.1%.

Because the figures are not adjusted for inflation, some of the higher order volume may be attributed to rising prices.

The report goes against the conventional wisdom, established late last year, that the economy was due for a recession. But surprise showings in the labor market and retail sales, as well as the latest manufacturing data, appear to contradict those expectations.

“I don’t see any significant evidence of recession in this report,” said Christopher Low, Chief Economist at FHN Financial. “Usually you see quite a bit of weakness in durables before a recession.”

Although it only accounts for about a tenth of U.S. GDP, economists use the manufacturing sector as a weathervane for the wider economy. Service-sector businesses account for a larger share of economic activity, but they are slower to react in unfavorable market conditions.  

“We often find that the equipment sector and manufacturing activity is the canary in the coal mine,” explained Michael Englund, Chief Economist for Action Economics. “They’re the businesses that are first to experience customer orders drying up, so they’re the quickest to pull back on activity.”

But when orders rise, as they did in January, that can be a sign that business owners are optimistic about their economic prospects.

“People once thought it was a given that we’d be heading into a recession in the first half of this year,” Englund said. “Now it looks highly unlikely that at least the months of January and February are recession months.”

Those favorable prospects may be a mixed blessing for those concerned about federal rate hikes. The central bank increased interest rates eight times over 2022, raising the federal funds rate from nearly zero to over four percent.

Those increases have so far failed to tame inflation, and based on the latest data, they have also not dampened demand. 

“They (the Federal Reserve) are going to look at payroll employment and the unemployment data and say, ‘this economy is too robust,’” predicted Stan Shipley,  Managing Director at Evercore ISI. “‘And as a consequence, we need to tighten two or three more times here.’” 

If the Fed does tighten interest rates, the manufacturing canary may start singing a more ominous tune. But for now, the canary is still singing. 

Comments are closed.