Durable Goods Report for February

BOTTOM LINE

• New orders for durable goods fell 1.4 percent (down $3.2 billion). Defense and private aircraft fell by $2.1 billion of that. Machinery accounted for $0.7 billion of the remaining $1.1 billion drop.
• Aircraft orders fell $1.1 billion after a January spike, but do not matter a whit for the 2015 outlook.
• Core capital goods orders fell 1.4 percent; machinery weakness accounted for much of that.
• The report was yet another anemic durables evaluation and the prognosis will not improve until the dollar weakens or domestic demand surges — neither is likely soon.

ANALYSIS AND OUTLOOK
Michael Montgomery, a U.S. economist for IHS Global Insight, Inc. (Engelwood, CO), reports that durable goods orders fell 1.4 percent, or $3.2 billion, with defense down a billion and aircraft down $1.1 billion. Machinery orders, faltering $0.7 billion, accounted for two-thirds of the remainder. Machinery orders for January were also revised lower. That leaves the more stable portions of durable goods orders down yet again, albeit by a percentage less ugly than the headline tally. Monthly defense and aircraft orders do not matter for the current year outlook because of long lead times from ordering to production and the fact that they both gyrate frenetically.

As is often the case, core capital goods (non-defense capital goods excluding aircraft) orders tell a cleaner story than the headline number, but that category too is downbeat. These investment goods orders fell 1.4 percent with machinery accounting for a large share of the weakness but far from all of it.

“The fundamental problems that the durable goods sector and manufacturing in general face are tepid domestic demand gains and drag from a strong dollar and weak foreign growth,” explains Montgomery. “Growth triggers demand for capital goods, and neither is growing very fast. U.S. growth outpaces many other parts of the world, but is not strong enough to offset the double whammy in machinery markets from weak growth abroad and a strong dollar that sends machinery buyers elsewhere in the world to source their needs. Thus, lethargy reigns in the machinery portion of the investment goods sector.

“It should continue to dominate until either domestic growth surges or the dollar falls back significantly,” he continues. “Neither of those is likely to be powerful enough in the first half of this year to beat the lagged effects of a robust greenback since those changes take up to a year to affect orders and shipments. The sole source of potential strength for the durable goods world in the near term is the consumer side of the ledger and that portion was hampered by the West Coast dock mess in February as well as winter weather that once more refused to be mild.

“March has a decent chance to look good in durable goods orders, but only because defense orders sank to well below normal levels in February making that strength temporary,” foresees Montgomery. “The headline number will sag and spike with noise from defense and aircraft, but underneath that will lie a central core going nowhere slowly for the remainder of the first half, and maybe until late summer.”

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