New durable goods orders report provides optimism but the slight increase may be skewed. “Even with this increase, if you look at the shipments of capital goods in the first quarter they are suggesting that business equipment spending has been fairly light,” said Avery Shenfeld, Managing Director and Chief Economist at the Canadian Imperial Bank of Commerce.
Headline orders for durable goods bounced back in February after two consecutive months of decline, but interest rates continue to strike caution into business spending.
New orders for U.S. manufactured goods increased to $277.9 billion in February, a 1.4% jump from January according to the report released by the Census Bureau on Tuesday. The swing coming from an uptick in nondefense aircraft orders of 24.6%. Despite the rebound, economists view manufacturing output as soft and suspect businesses are cautious of large scale spending, in part due to the Federal Reserve’s decision to keep interest rates high.
“Even with this increase, particularly if you look at the shipments of capital goods in the first quarter they are suggesting that business equipment spending in the first quarter has been fairly light,” said Avery Shenfeld, Managing Director and Chief Economist at the Canadian Imperial Bank of Commerce.
Interest rates have become a big part of it. The federal reserve raised interest rates in July of last year to the range of 5.25-5.50%, subsequently commercial and industrial loan rates have decreased.
“Financing costs, at least debt capital is more expensive and we’re seeing a more sluggish trend in lending volumes which is symptomatic of some caution on people taking on additional debt to finance capital projects,” added Shenfeld
Business owners and consumers are still feeling the pinch from the effects of inflation on durable goods.
“Everything is way up,” said Joe Arici, manager at a Mobil service station in Queens.
He says that over the past six months, the cost of motor vehicle parts has increased at a steady pace.
“It’s not good, Everybody is unhappy about it and it’s hard for me to make sales. What I’ve had to do is I’ve had to look around and find the cheapest way out.”
The report did show signs of optimism.
Aircraft orders, which took a plunge last month by 58.9%, managed to bounce back after Boeing reported receiving orders for 15 commercial aircraft. Although that number is short from orders in February a year ago, it is an increase from the three orders logged last month.
Other parts of the report revealed a slow down. There was a defense capital goods decrease of 12.7% as well as a computer and electronics spending decrease of 1.4%, a release of steam after two consecutive months of increase.
The small gains in nondefense capital goods worked to upset the decline in defense capital goods and computer products but overall orders only rose 0.5% when transportation sales were excluded. Indicating businesses are weary about big spending.
“I think that is indicative of not a lot of momentum,” said Thomas Simmons, Senior economist at Jefferies LLC. Simmons credited Boeing’s increases to a seasonal issue “there tends to be more air sales in the second half of the year specifically in Q4 so demand for aircraft always seems to fall off for january.”
Despite the overall rebound signaling ease of latest investment sag, both Simmons and Shenfeld agree that the report is slightly skewed. Shefeld believes the federal reserve’s decision to keep interest rights at a high is causing an uneasy and tentative environment for investors.
“We don’t expect to see a broad upturn until we see stronger conditions in the factory sector and get closer to interest rate relief from the federal reserve,” said Shenfeld.