Headline durable goods orders came in lower than anticipated, increasing by just 0.8%, where a rise of just 1.9% was expected. This follows a drop of 3.1% in February. On a three-month moving average basis, orders are now 0.7% higher, following a 1.1% change in February. Meanwhile, orders excluding transportation were 0.2% lower, versus an expected 0.5% reading. Excluding defence, orders decreased by 1.0%, following a 2.3% fall in February. Nondefence capital goods orders excluding aircraft and parts (the favoured proxy for business investment) were flat after falling by 2.7% in February; these orders were 2.4% lower than in March 2015.
Inventories were unchanged in the month, which follows almost seven consecutive monthly declines, barring an increase in December. Unfilled orders fell by 0.1%. Shipments also declined, by 0.5%, and are 1.5% lower than a year ago. Large swings in transportation orders continue, with defense aircraft and parts orders shooting up by 65.7% in March after falling by 30.4% in February.
This month’s increase is only the second in the last five months, as manufacturers continue to face very low levels of demand against still rising levels of inventories relative to sales. Excluding the most recent recession, the inventory-to-sales ratio is now the highest it has been since the middle of the previous recession in 2001. This spells continued weakness for prices, profits, and new orders over the near term. The fact that the dollar finally seems to be weakening is helpful, along with the rise in energy prices. However, it is also true that the capacity of producers is still fairly significant and can be ramped up quite quickly again, as there has seemingly been only a limited clearing out of production capacity. Last week’s Beige Book reported that: “Manufacturing activity increased in most Districts in late February and March. Contacts described the overall pace of growth as moderate in Richmond and Chicago, while growth was more modest in Philadelphia, St. Louis, and San Francisco. Only Cleveland and Kansas City reported declines in activity. By industry, district reports indicated that the strongest performers were autos (Cleveland, Richmond, Chicago, and Dallas), aerospace (Philadelphia, Cleveland, and Chicago), and computers and electronics (Boston and Dallas).” “Several Districts reported weak overall demand for heavy machinery, with Chicago and Minneapolis noting softer demand for agricultural and mining machinery than for construction machinery. Suppliers for the oil and gas industry consistently reported weak demand.” Net-net, this sector still faces significant headwinds, though there are tentative signs that at least some of these are now starting to ease.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.