Weak US durable goods orders raise doubt over strength of expected recovery

In March US durable goods expanded 0.8%; however, the detailed figure indicates that the factory sector’s turnaround continues to be uncertain, noted Wells Fargo. The durable goods orders data was another disappointing data after the manufacturing sector’s data for March was released.

Purchasing managers’ indices such as the ISM index indicates towards a modest pick-up; however, durable goods orders and industrial production have declined quite below expectations and raises doubts regarding the expected recovery’s strength, said Wells Fargo.

The headline figure came in below expectations. Looking at important categories, it shows that the below expected figure is not just due to some particular and likely temporary factors. Meanwhile, increase in orders came from mostly the defence sector, where orders increased almost 50% in March. Ex-defence and ex-transportation orders dropped 1% and 0.2% respectively.

Orders for nondefense aircraft were likely to give certain boost to the headline figure; however, the orders dropped 5.7% after adjusted seasonally. Core orders, excluding aircraft, remained unchanged last month after falling 2.7% in the prior month. On an annualized three-month average basis, core orders declined 4.9%.

Meanwhile, shipments, which are a better measure of present activity, declined 0.5% last month. Shipments of nondefense excluding aircraft increased 0.3%; however, they still came in below expectations. Core capital goods orders fell at an annualized rate of 9.6% q/q. The fall indicates another drop in equipment spending in Q1. Real business spending on equipment is expected to have declined 2.3% in Q1, according to Wells Fargo. This would be its second consecutive decline.

The below expected growth in core shipments shows certain risks on the downside. However, core orders seem a bit stronger, while the momentum is still favorable in the end of Q1. Equipment spending is likely to record a modest recovery in Q2, noted Wells Fargo.