Headline durable goods orders came in moderately higher than anticipated, increasing by 1.7%, where a 1.4% reading was expected. This follows an increase of 2.3% in January. On a three-month moving average basis, orders are now 1.0% higher, following a 1.1% decrease in January. Meanwhile, orders excluding transportation were 0.4% higher, but below the anticipated 0.6% increase. Excluding defence, orders increased by 2.1%, the same as in January. Nondefence capital goods orders excluding aircraft and parts (the favoured proxy for business investment) were 0.1% lower after rising by 0.1% in January; these orders were 2.7% higher than in February 2016.
Inventories were 0.2% higher following a 0.1% increase. Unfilled orders were flat. Shipments rose by 0.3%, and are 2.7% higher than in 2016. Large swings in transportation orders continue, with nondefence aircraft and parts orders rising by 47.6% and defence aircraft and parts orders decreasing by 12.8% in February, after rising by 65.9% in January.
We have previously commented on the sharp improvement in some of the softer sentiment-type economic data (e.g., the ISM indices and the NFIB’s small business optimism index) and the fact that this will need to start to be met by an improvement in some of the harder economic data (e.g., factory orders and industrial production); if it does not, then disappointment is likely to set in. Today’s durable goods orders report for February was generally positive news, in that the headline rate was better than expected and there was some improvement in the revised historical data, though core, nondefence capital goods less-aircraft and parts was once again soft. We have already seen positive improvement in the slightly harder data, i.e., industrial prices, where there has been a stark improvement in the annual rate of growth of the Journal of Commerce commodity price index, which has historically been a good leading indicator of subsequent changes in factory orders. Furthermore, the recent weakness in C&I lending should not be overly concerning as it tends to be more of a lagging indicator. With sentiment from the ISM and small business so strong, this too should result in some follow-through to improved bank lending. For the Fed, this continues to be very much in line with its playbook of two more rate increases this year.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.