Aircraft Lift Durable Goods Orders

Durable goods orders jumped by 5.6% in December, more than double the consensus expectation of +2.5% while November orders were revised up to -1.7% from the previously reported -2.1%. Those gains overstate the underlying strength in the data. Aircraft orders alone soared by 116% in December. Boeing aircraft orders skyrocketed to 250 units in December from 21 in November, the most in five years.  A major U.S. carrier announced a sizable order for 100 Boeing 787 Dreamliner jets. (Widebody aircraft that take years to assemble and a long time to show up as a boost to the overall economy.)

Orders for motor vehicles and parts, a subcategory of transportation orders, rose +0.7% in December after no change in November. Automakers continue to replenish their depleted inventories when computer chips become available.

Excluding transportation orders, durable goods orders contracted by 0.1% in December following tepid gains of 0.1% in November and October.  Machinery orders dropped by 1.7% in December, the largest drop in 10 months, losing 1.7% in December.  They have also declined in three out of the last four months.  That reflects a contraction in overall manufacturing activity at the end of 2022.

Orders for computers and electronics fell 0.6% in December, down four out of the last six reports. Primary metals orders declined by 0.3% in December; down five of the last six. Even defense capital goods orders lost ground in December, -2.8%, but fabricated metals orders increased by 0.3%. 

Core capital goods orders, which exclude aircraft and defense orders and are a proxy for business investment plans, fell 0.2% in December. That followed no change in November and a 0.3% increase in October. That confirms our view that economic momentum slowed over the course of the quarter and suggests another drop in business investment in the first quarter of 2023.

Business fixed investment rose 0.7% on a seasonally adjusted annual rate basis in the fourth quarter GDP report. That marks a sharp slowdown from the 6.2% annualized pace of the third quarter. Equipment spending alone declined by 3.7%. The slowdown in momentum over the fourth quarter sets the stage for deeper declines in equipment spending in the first half of 2023.

Bottom Line

The data on durable goods orders is misleading, given the surge in aircraft orders, which take years to complete. The goods-producing sector faces a challenge over the next several months. Manufacturing activity is contracting and poised to fall further as retailers and manufacturers struggle to deplete an overhang of inventories. Higher rates are another hurdle as they are boosting the costs of financing new investment and the costs of carrying inventories. This is confirmed by soft data on investment plans. All purchasing managers' indices (PMIs) have fallen into contraction territory.