Core durable goods orders fall/ Tax reform

Non defense capital goods orders ex aircraft, aka core capital spending, in February fell .1%, worse than the estimate of up .5% and only partially offset by a two tenths revision up in January. The y/o/y change is essentially zero with a .2% rise. See chart below for the absolute dollar level of spending and you can see that it’s no different than where it was in 2006. With capacity utilization at just 75% vs the long term level of 80% and after many years of distorted business decisions because of artificially low interest rates this is the result.

 

Orders for vehicles/parts fell .8% m/o/m and is now down 3.4% y/o/y. It’s clear that peak auto sales are upon us and subprime delinquencies are rising. Orders for computers/electronics fell for a 2^nd month but are up 3% y/o/y. Electrical equipment rose vs January but are down vs last year. Machinery, was flat but up y/o/y by 1.6%. Metals orders, both primary and fabricated, were higher y/o/y. Core shipments, which gets plugged into GDP, rose 1% m/o/m, above the estimate of up .2% but they are still down 1.6% y/o/y.

Bottom line, for all the optimism seen in the business confidence figures, there was little sign of that translating into an increase in capital spending in February. In my note earlier I raised the possibility of corporate decision making being on hold until companies get a sense of whether tax reform (especially on the immediate expensing issue) happens this year or next as that can of course impact the timing of spending. That seems to be the case for now and why reform must happen sooner rather than later so as not to slow growth further.