Durable Good Orders
Significant strength is the verdict for February’s durable goods orders and with it, significant strength is now the tangible outlook for this year’s factory sector. Durable goods orders jumped 3.1 percent in February to just top Econoday’s high estimate with ex-transportation orders, at a gain of 1.2 percent, very near the high estimate. The most convincing strength in the report comes from core capital goods (nondefense ex-aircraft) where orders surged 1.8 percent, which is well beyond the high estimate, with related shipments jumping 1.4 percent in what will give a major boost to business investment in the first-quarter GDP report.
Total shipments rose a very sharp 0.9 percent with ex-transportation shipments up 1.0 percent. Unfilled orders, which have been weak, showed improvement with a 0.2 percent gain. Turning to inventories, they rose a healthy 0.4 percent but, relative to shipments, need to be refilled as the inventory-to-shipments ratio fell one notch to 1.64. The dip in this reading points to the need for restocking which will be a special plus for factory payrolls.
Looking at product groups, orders for primary metals, which are now in special focus given the prospect of trade tariffs, surged 2.7 percent in the month in a gain that may reflect, based on anecdotal reports, rising prices for steel and aluminum. Fabrication orders rose 0.8 percent in the month with machinery, which is at the heart of the capital-goods group, rising 1.6 percent. Civilian aircraft orders, which are typically volatile month-to-month, supported February’s results, up 25.5 percent, with motor vehicles also showing unusual strength at 1.6 percent.
Year-on-year rates of growth are moving from the mid-single digits to the high single digits led by 8.9 percent overall with ex-transportation up 8.1 percent and capital goods up 8.0 percent. Today’s report helps confirm the enormous strength that has been posted over the last year by regional and private factory surveys and points to a sector that will increasingly contribute to employment growth and to GDP growth.
Despite another uptick in mortgage rates, purchase applications for home mortgages rose a seasonally adjusted 3 percent in the March 9 week, raising the year-on-year gain in the unadjusted Purchase Index by 2 percentage points from the prior week back up to 3 percent. But the more interest-rate sensitive applications for refinancing fell 2 percent in the week, taking the refinance share of mortgage activity down 1.7 percentage points to 40.1 percent, its lowest level since September 2008. The average interest rate on 30-year fixed rate conforming mortgages ($453,100 or less) rose 4 basis points from the prior week to 4.69 percent, the highest level since January 2014.
There’s very little change between the second and first estimates for fourth-quarter GDP, revised 1 tenth lower to an as-expected 2.5 percent annualized rate. Consumer spending is unchanged at a very strong 3.8 percent as downward revisions to spending on durables (down 4 tenths to a 13.8 percent rate) and nondurables (down 9 tenths to 4.3 percent) are offset by an upward revision to the largest category of service spending (up 3 tenths at 2.1 percent).
Residential investment gets a noticeable upgrade to a 13.1 percent rate from 11.6 percent in the first estimate while nonresidential investment is lowered by 2 tenths to 6.6 percent. These are both very solid and, like consumer spending, point to fundamental economic demand. Net exports are virtually unchanged in today’s revisions, at a very sizable $652.2 billion and pulling down the quarter’s headline GDP rate by 1.1 percentage points. Inventories are also a negative, slowing in the quarter to an $8.0 billion build from $38.5 billion in the third quarter and pulling down the headline by 0.7 points.
Another one of the positives in the quarter is government purchases which are revised marginally lower to 2.9 percent. This rate may become a positive wildcard in future quarters given the outlook for increased deficit spending. Another possible positive is inventory growth which is off to a fast start so far this quarter as businesses scramble to restock shelves amid strong demand.
Strength is definitely the message of this report, masked by the nation’s trade imbalance and the quarter’s inventory change excluding which GDP rose 4.3 percent, a reading that is unchanged from the first estimate. On the inflation front, the GDP price index rose 2 tenths in the quarter to a 2.3 percent rate which is down 1 tenth from the first estimate though the core, however, is revised 1 tenth higher to 2.2 percent which, in a hint of building pressures, marks a 6 tenths acceleration from the third quarter.