Durable goods jumped 4.9% well over the Econoday Consensus Estimate. Aircraft led the way, but core capital goods bounced sharply as well. Curiously, the bond market let out a big yawn. Treasury yields fell, the opposite of what I expected when I saw the report.
The factory sector bounced back strongly in January, indicated first by last week’s industrial production report and now by durable goods orders which are up a very strong 4.9 percent. Aircraft did add to the gain but when excluding transportation equipment, durable orders still rose 1.8 percent. And core capital goods orders, which had been weakening, bounced back strongly with a 3.9 percent gain.
Machinery posted big gains in the month especially for new orders as did computers and fabricated metals. Motor vehicles showed strength in both orders and shipments.
Total shipments jumped 1.9 percent in the month, though shipments of core capital goods, held down by prior weakness in orders, fell 0.4 percent to open the first quarter on a down note. But a positive in the report is a 0.1 percent dip in inventories which, together with the rise in shipments, pulls down the inventory-to-shipments ratio to a leaner 1.64 from 1.67. And unfilled orders, after contracting sharply in December, inched 0.1 percent ahead in January.
This report is healthy but January’s strength may prove to be a one-hit wonder for a sector that is getting hurt by weak exports and perhaps by slowing domestic demand. Early indications on February’s factory conditions have been uniformly disappointing including Monday’s manufacturing PMI and Tuesday’s report from the Richmond Fed.
Indications on the factory sector have been weak but not the manufacturing component of the industrial production report where renewed strength in vehicles made for a rare gain in January. Durable goods orders for February are likewise expected to show rare strength, at least for the headline level where a 2.0 percent gain is expected. Ex-transportation orders, however, are seen unchanged. This report simply fizzled into year end with broad declines including for capital goods where weakness, tied to weak global demand and weak energy-related demand, points to lack of confidence in the outlook.
One Hit Wonder?
For a welcome change, I generally agree with the Econoday commentary.
This report was stronger than expected, but the bond market reacted as if the numbers were bad. Treasuries rallied across the board, with yields dropping. That’s another good reason to believe this strength will not last.
By the way, I was in a very remote section of Death Valley yesterday with no phone or internet, so was late in approving comments.
Mike “Mish” Shedlock