US Durable Goods Orders Rebound 1.8% in January 2017

Durable goods orders rebounded due to purchases of military and civilian aircraft

In a sign that companies remained upbeat at the start of 2017, data released by the US Commerce Department on February 27th, 2017, showed that orders for US durable goods rebounded in January 2017, as reported by Bloomberg. Orders for goods meant to last at least three years rose 1.8% in January 2017 to a seasonally adjusted $230.35 billion, after falling 0.8% in December 2016, mainly due to purchases of military and civilian aircraft. The jump in orders for durable goods overshadows a weak start to 2017 for business investment in new machinery and was primarily due to a significant rebound in orders for transportation equipment, which spiked by 6% in January 2017 after tumbling 4.4% in December 2016. The rise came after two consecutive months of declining orders and reflected jumps in two volatile categories: a 69.9% surge in orders for civilian aircraft and parts, and a 59.9% increase in orders for defense aircraft.

Excluding the transportation category, orders fell 0.2% after a 0.9% gain in December 2016. Economists had expected a 2% rise in total orders in January 2017. The drop in ex-transportation orders reflected notable decreases in orders for electrical equipment, appliances, and components, communications equipment, and primary metals.

Orders for non-military capital goods excluding aircraft, a closely watched proxy for future business investment, unexpectedly fell 0.4% after a 1.1% rise in December 2016. That was the sharpest one-month drop in the category since September 2016. Still, the broader trend remained positive with total durable-goods orders rising 1.4% in January 2017 from the year-ago period. Orders for non-defense capital goods excluding aircraft rose 2.6% compared to January 2016.

Even with the latest decline, orders for non-defense capital goods increased at an 8.9% annualized pace over the three months ended January 2017, the fastest pace of growth since 2014. Such investment includes machinery, computers, and communications gear. Economists had forecast a 1.6% gain for total durable goods, after the prior month was initially reported as a decline of 0.5%.

Machinery orders increased for a third successive month with a 0.5% increase giving a 4.3% annual increase which will boost confidence in the underlying manufacturing outlook. Unfilled orders, however, declined 0.4% on the month and have fallen in seven of the last eight months to give a 2.0% annual decline, lending concerns and raising doubts about future production plans, especially in the transportation sector. Overall shipments declined 0.1% following a 1.6% December 2016 increase with a 3.6% annual increase.

Fall in shipments of non-defense capital goods

Data released by the US Commerce Department also showed that shipments of non-defense capital goods excluding aircraft, used in the calculation of gross domestic product, fell 0.6% after rising 1.6%. Orders for military capital equipment rose 8%, and demand for non-defense durable goods increased 1.5%. Durable goods inventories were little changed, while unfilled orders for non-defense capital goods excluding aircraft rose 0.5%.

Before January 2017, demand for business equipment had shown marked improvement as companies grew more upbeat about the economy’s prospects and global markets began recovering. Faster growth, along with corporate tax reforms and reduced regulations may spur investment, which has been a laggard during the current economic expansion.

US manufacturing gains traction

In recent months, the US manufacturing sector has witnessed resurgence after a weak spell caused by falling oil prices, which hurt the domestic energy industry, and a strong dollar that weighed on exports by making US products more expensive for foreign customers. However, firming global growth and stabilized energy prices have helped bolster the industrial side of the economy. A privately produced gauge of US manufacturing activity, the Institute for Supply Management’s (ISM) purchasing-managers index, rose in January 2017 to its highest level since November 2014.

Data from ISM on released on January 03rd, 2017 showed that US manufacturing expanded at the fastest pace in two years in December 2016, reflecting stronger output and a surge in new orders since August 2009. US manufacturing remained upbeat despite a stronger dollar, which is expected to hurt exports to some extent. ISM stated that its index of national factory activity increased to 54.7, the fourth straight monthly advance, from 53.2 in November 2016, and the highest since December 2014. A reading above 50 indicates an expansion in manufacturing, which accounts for about 12% of the US economy.

Major US companies are ramping up their capital expenditures. Fixed non-residential investment in equipment rebounded at a 3.1% annual rate in Q4 FY16 after four consecutive quarters of decline, according to Commerce Department data. Broader business investment, including spending on structures and intellectual property like software, rose in late 2016 for the third consecutive quarter. Although seen to be seen as slightly disappointing, the data is not likely to trigger any additional pressure on the Federal Reserve to tighten monetary policy.

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