March 24, 2017
Durable goods orders rose 1.7% in February after having climbed 2.3% in January. As always this is a very volatile series. Over the course of the past year durables have risen 5.0% which is the largest year-over-year increase since mid-2014..
In most months transportation orders are the biggest category contributing to that month’s change — both to the upside and downside. That was certainly the case in recent months. Transportation orders rose 7.0% in January and a further 4.3% in February. This means that non-transportation orders rose 0.4% in February after having risen 0.2% in January. Over the past year non-transportation orders have risen 3.8% and they seem to be quickening. In the past six months they have been climbing at a 7.5% pace, and in the past three months at a 5.6% rate.
Economists are also interested in capital goods orders so we can get some sort of a handle on the investment spending portion of GDP. But even capital goods orders can get blown around from one month to the next if there is a huge defense order or if there is a big airline order. Orders will rise very sharply one month, only to decline almost as sharply in the subsequent month.
Thus, the focus is typically on non-defense capital goods orders ex air. These orders fell 0.2% in February after having risen 0.1% in January. Over the course of the past year such orders have risen 2.7% which is the biggest yearly increase since mid-2014. At long last they certainly seem to be on the rise.
The backlog of orders was unchanged in February after having fallen 0.3% in January. If orders begin to climb consistently the backlog will climb as well which will eventually boost production. We are not looking for a lot of strength from the manufacturing sector this year, but we do expect it to continue its gradual uptrend.
We think the worst is over for the manufacturing sector. Home prices are rising. Consumer net worth is at a record high level. Corporations are making near record profits. They have a ton of cash to invest. Interest rates are near historic lows. And the rate of capacity utilization in the manufacturing sector suggests a need fairly soon to either re-furbish the assembly line and/or invest in new technology. And with both corporate and consumer tax cuts now in the works the factory sector should get a boost in 2017. The underpinnings of the economy remain firm.
We expect investment spending to climb 3.1% in 2017 and 4.8% in 2018.