By Harvard Zhang
Orders for big-ticket goods surged in January, in a bit of good news for the troubled U.S. manufacturing sector. A key indicator of business investment also showed a positive sign.
The Commerce Department said Thursday that new orders of durable goods – everything from aircrafts to TV sets – increased 4.9 percent last month topping the median estimate of 2.9 percent economist polled by Bloomberg LP had been expecting.
The “biggest surprise,” was a 3.9 percent uptick in new orders of core capital goods, Wells Fargo Securities economists Tim Quinlan and Sarah House said in a report. Core capital goods are equipment and machinery that companies buy to upgrade production, but it excludes defense use and aircrafts.
The January increase in new factory orders came on the heels of two months in which business customers were holding back on their orders.
Businesses are perhaps “beginning to change and adapt to the evolving economic environment,” Jennifer Lee, senior economist at Toronto, Canada-based BMO Capital Markets Corp., wrote in an analysis. “Still, one month doesn’t make a trend but maybe this report will also help quiet the recession talk.”
Policy makers and Wall Street read the durable-orders tea leaves to identify the health of U.S. industrial sector, and the state of business investment. Shipments of core capital goods in the durables report are used to gauge investment that makes up 15 to 20 percent of U.S. GDP. A second estimate of the fourth quarter’s figures will be released tomorrow.
Order gains across the board
January’s increase of new durables orders was the first in three month and the largest since last March. All major categories of durable goods recovered from December’s new-order declines, led by a 54.2 percent surge in the highly volatile civilian aircraft orders.
New orders excluding transportation were also up a modest 1.8 percent last month, the first upturn in three months and the most since June 2014. Manufacturing industries including machinery and primary metals (e.g., copper and iron) posted new order increases as the manufacturing sector has been suffering from a demand slowdown in mining and oil and gas industries.
“Manufacturing industries have contracted sharply since the middle of 2014, it is thus encouraging to see some rebound in orders in these categories, particularly for machinery,” JPMorgan Chase & Co. economist Jesse Edgerton said in a research report.
Rosier business spending
Despite a 0.4-percent shipment downturn of core capital goods, January’s new orders increased 3.9 percent, which was tipped to remove some downside risk of further steep retreats in shipments. The Commerce Department relies on figures of core capital goods shipments to calculate business spending in GDP reports.
While the rising new orders breathed some life into the outlook of the battered business investment sector, “the continued downward drift in measures of business sentiment suggests that softness in the manufacturing sector is not yet behind us,” Edgerton said.
U.S. manufacturers have been struggling for over a year because a strong U.S. dollar makes American goods very costly in international markets.
Durables inventories edged down 0.1 percent in January to $396.3 billion, signaling that U.S. factories were adjusting to dwindling global demand.
Inventories of durable goods decreased six times in the past seven months as the U.S. GDP slowed down to a 0.7 percent growth last quarter due to an inventory glut preventing factories from restocking. January’s downsizing of inventories suggested better balances.
Durables inventories monthly changes
“This gradual ‘right-sizing’ of inventories to a softer demand environment is an indication that businesses do not appear to be making the mistake of so many prior cycles when businesses have large unintended inventory builds,” Quinlan and House of Wells Fargo said in a research report.