Manufacturing orders saw reduced growth in February, the latest sign of an economy that is starting to cool in response to rising borrowing costs. 

Orders for core capital goods–business equipment excluding aircraft and defense– rose 0.2% in February, less than the 0.3% growth recorded for the previous month. Shipments of core capital goods showed zero growth, while total orders fell by 1.0% due to falling demand for transportation goods.

These figures suggest that businesses are slowing their investments in anticipation of leaner times ahead. Until last month, the economy seemed to be resisting the Fed’s efforts to curtail its growth with rising interest rates. Those rate hikes now seem to be kicking in–even as banking fears cause lenders to tighten their purse strings even further. 

“It was disappointing,” said Stan Shipley, a managing director at Evercore ISI.  Much of that disappointment came from unexpected drops in technology and civilian aircraft orders—two areas that tend to show larger swings than other goods. 

But even excluding those categories, Shipley said, today’s report “wasn’t particularly strong.”

It also undercut earlier estimates, suggesting that January’s growth was not quite as robust as it initially appeared. The increase in core capital goods orders for that month was first reported at 0.8%, and later revised downwards to 0.3%. Total orders initially showed a 4.5% drop, but are now calculated to have fallen by 5%. 

The latest report did not account for inflation, which continues to exceed 6% on an annualized basis. Adjusting for rising prices makes it more apparent that manufacturing demand is starting to slow, according to Christopher Low, Chief Economist at FHN Financial. 

“When you look at an inflation-adjusted measure of those (core capital goods) orders,” Low explained, “they have declined six months in a row.” Moreover, surveys of purchasing managers have indicated four consecutive months of contraction.

Altogether, those data points provide growing evidence that businesses are lowering their expectations.  “In most of the manufacturing data,” Low added, “industrial activity has been falling.”

It’s still too early to see how manufacturing will be affected by the ongoing banking crisis, which started with the collapse and seizure of two regional institutions last week. In response, other banks have raised their interest rates and lending requirements, making it more costly for businesses to make new investments.

That could mean trouble for small businesses like West Tool Enclosures, a metal fabricator located in Fergus Falls, MN. The company builds protective cases for municipal water controls.

“We’re growing rapidly,” said owner Glen Westra, who doubled his workforce from three to six over the past year. He’s now hoping to boost his business with new robotic welding machines.

But at a cost of $100,000 per robot, that investment may be more expensive than he initially planned. “Interest rates are going up, that isn’t any fun for me,” Westra said in a phone call. “There’s definitely some capital investment that has to come from somewhere.”

And higher rates may mean a smaller expansion and fewer robot welders. “I need one, but I want six,” Westra said. For now, he expects to settle somewhere in between. 

And those troubles are likely to affect other businesses as well. “Conditions are just growing less and less favorable for capital expenditures,” said Shannon Seery, an economist at Wells Fargo. “Banks are likely going to tighten standards further, which will further weigh on access to credit and borrowing.”

But for the wider manufacturing sector, it may take several months before the full effects of the banking predicament become apparent. Until then, economists will be watching for further signs of a manufacturing slowdown.

“We’ll be watching the auto sector fairly closely,” Low said. “That’s one of the places where tighter bank lending standards should have an immediate impact.”