Behind the Durable Goods Bummer
By Michael Englund
It looks like the latest "soft patch" in the U.S. economy may be softer than originally thought. A government report released Apr. 27 shows that durable goods orders -- the number of new orders for goods intended to last at least three years placed with domestic manufacturers for immediate and future delivery -- plummeted 2.8% in March, well below economists' median forecast of a 0.3% drop. And shipments fell 0.2%. Data for orders and shipments from previous months were revised lower.
What caused the shortfall? It was led by a 26% drop in aircraft and parts orders, although vehicles, electrical equipment, and machinery all revealed large declines as well. Overall, transportation orders were down 7.8% on the month.
Excluding transportation, orders dropped 1%, after a 0.2% decline in February. Nondefense capital-goods orders excluding aircraft fell an additional 4.7%, after a 2.5% drop in February. Inventories rose 0.4% in March. The inventory-to-sales ratio edged up to 1.43 from 1.42.
Widespread weakness in the durables data for March has reintroduced fears of slowing growth just prior to Apr. 28's advance release of first-quarter U.S. gross domestic product figures. Though we at Action Economics always warn against reading too much into a monthly report, and particularly the reports for this quirky month of March, the durable goods data were indeed significant. This report has taken a big chunk out of the GDP outlook in the first half, via the important nondefense capital goods component. At Action Economics, we've revised downward our first-quarter GDP estimate to only a 3% gain, and we've lowered our second-quarter estimate to 3.5%.
With the new round of durables data it appears that production data will also moderate alongside swings in sales, giving credence to "soft patch" concerns. We expect the lull to be minor relative to normal GDP fluctuations, as was seen during the last "soft patch" in 2004's second quarter, but the slide in growth should have noticeable effects on the monthly economic reports nevertheless.
For the GDP's consumption component, it appears that the shortfall will be smaller in this year's second quarter than in the comparably soft second quarter of 2004, -- though the jury is still out on the trend in gasoline prices in 2005's second quarter and the associated impact on spending.
Evidence that spending may be holding up better in this round of gas-price increases than during the similar round last year seemed go against the economic pessimists over the last few weeks. But the March durables report has reignited those concerns. It now appears that real fixed investment spending will indeed slow in the first and second quarters from the robust growth rates over the last three quarters. Growth in investment remains solid, as we estimate 6% to 7% advances in both the first and second quarters, but these rates fall short of the 9% to 14% increases of the prior three quarters.
The new round of weak forecasts for real equipment and software spending in the first and second quarters, which we now estimate at 10% in each quarter, was led by the critical nondefense capital-goods figures that were contained in the March durables report. The shipments data from this report, excluding the volatile aircraft sector, posted sizable drops in February and March of 2.8% and 1.1%, respectively, that caught economists by surprise.
These declines reversed prior unexpected strength, with gains of 3.1% in December and 3.6% in January. We view these as oscillations around a still-solid growth path as shown in our forecasts below. But the downswing has coincided with recent weakness in other production indicators that now appears more significant.
MORE UNFILLED ORDERS.
The changes in the orders data have been more dramatic than those in shipments, but the pattern is the same. Orders for nondefense capital goods, excluding aircraft, fell 2.5% in February and 4.7% in March, following hefty gains of 3.4% in December and 4.4% in January. Again, we view the big swings as noise around a still-solid trend, but the recent downtick has lowered our forecast trajectory.
The pattern in unfilled orders, which is the set of data actually surveyed by the Census Bureau to calculate new orders, is both more stable and encouraging. Unfilled orders are continuing to pile up, and this trend should support solid production gains of equipment over the coming quarters despite the recent orders downturn.
In total, the combination of a two-month downtrend in capital-goods shipments and orders alongside prior evidence of a potential slowing in household spending is adding new fuel to "soft patch" fears. Though we at Action Economics continue to view the impact of the recent surge in gasoline prices as a temporary phenomenon similar to what was seen last year at this time, it's now clear that a ripple of weakness is likely passing through the monthly U.S. economic data. And it has yet to fully run its course.
Englund is chief economist for Action Economics