Headline durable goods orders came in significantly lower than anticipated, decreasing by 0.4%, where a 2.5% reading was expected. This follows a decrease of 4.8% in November. On a three-month moving average basis, orders are now 0.1% lower, following a 0.2% increase in November. Meanwhile, orders excluding transportation were 0.5% higher, in line with the expected rise. Excluding defence, orders increased by 1.7%, following a 6.8% fall in November. Nondefence capital goods orders excluding aircraft and parts (the favoured proxy for business investment) were 0.8% higher after rising by 1.5% in November; these orders were 2.8% higher than in December 2015. This was the first increase in the annual rate of change October 2015.
Inventories were unchanged following a 0.2% increase. Unfilled orders decreased by 0.6%. Shipments increased by 1.4%, and are 0.5% lower than in 2015. Large swings in transportation orders continue, with defense aircraft and parts orders falling by 63.9%, and nondefense aircraft and parts orders increasing by 42.4% in December after falling by 80.4%.
The sharp increase in business sector confidence following the Trump victory has been surprising. Clearly many expect President Trump to roll back years of regulation, stymie foreign competition and cut their tax rates. So far, he seems to be doing his best to achieve these goals. However, these improvements will need to continue in order for disappointment not to set it. As a result, markets will be laser focused on the industrial production and factory orders data going forward, to ensure that these expectations are indeed being met. In this week’s Economics Weekly, we make the case for stronger business investment this year, driven by factors such as the end of the major inventory drag on GDP, some stabilisation in the energy commodity complex, and any Trump-related legislative incentives. We also acknowledge that the risks around this scenario are far from negligible and likewise cannot be ignored. The Fed will of course also be watching these developments closely; with the possibility of further stimulus being layered on top of an economy already close to full employment, the potential for faster-than-previously-anticipated inflation increases.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.