Business investment and plans soften

Durable goods orders contracted by a larger-than-expected 1% in February, missing expectations for a small gain of 0.2%. January orders were revised lower to show a larger drop of 5% versus the originally reported -4.5%. 

A notable pullback in transportation orders, down 2.8%, contributed to the weakness in February. Non-defense aircraft orders fell 6.6% as Boeing snagged just 5 plane orders versus 55 units in January. Motor vehicles and parts orders declined 0.9% after being flat in January. The motor vehicle industry continues to face difficulty in maintaining production schedules due to labor shortages.

Defense orders fell 7.4% in February, which follows strong gains in the recent months. We expect defense spending will rebound, given the continuation of the war between Russia and Ukraine. Other industries showing declines in February included machinery, -0.5%, and computer and electronics orders, -0.1%.

Last month, underlying data such as capital spending and factory investment in the current quarter had shown strength, suggesting a better outlook at the start of the year. However, the latest data for February revealed muted outcomes, clipping that optimism. This is an area of softness that Federal Reserve Chairman Jay Powell noted in his press conference following the Federal Open Market Committee earlier this week.

Core shipments, an input into current GDP calculations via the nonresidential fixed investment component, were unchanged in February. This is a notable stepdown in momentum from a downwardly revised +0.9% in January. 

Nondefense capital goods orders excluding aircraft, a proxy for business investment, rose 0.2% in February after rising a revised 0.3% in January. It was originally up +0.8%. The latest gains fall at the bottom of the range of increases over the last year and are expected to move lower, given the current tightening of credit conditions, especially across middle-market manufacturers.

As stakes are being put into the ground from the Inflation Reduction Act, particularly to those sectors tied to electric vehicles, electrical equipment orders rose 1% in February after a robust gain of 2.1% in January. The three-month annualized change for those orders rose 16.5% in February. Those gains and the ramp-up of infrastructure spending associated with the 2021 stimulus package are blunting weakness elsewhere.

One signal that casts a pall over the near-term momentum of the overall factory sector is the ongoing weakness reflected in manufacturing surveys. The S&P Global Purchasing Managers Index (PMI) for manufacturing new orders was reported at 48.8 for March, the sixth straight month of a below-50 result, signifying contracting activity.  

Bottom Line

The factory orders data, along with the March PMI, indicate a manufacturing sector that is losing momentum.  Given the expected tightening in credit conditions for businesses, also noted by Powell, the emerging weakness is likely to accelerate in the second quarter of 2023.