Durable Goods Orders Plunge 5.7% as Sequestration Kicks In

The effects of the sequestration are starting to be felt, with the Durable Goods report from the U.S. Census Bureau at the Department of Commerce reporting that new orders for manufactured durable goods in March decreased $13.1 billion, or 5.7 percent, to $216.3 billion. This decrease, down two of the last three months, followed a 4.3 percent February increase and a 3.7 percent decline in January. This was the biggest decrease in eight months and exceeded analysts' forecasts for a 3.0 percent drop. And February's gain was revised down from 5.7 percent. Excluding transportation, new orders decreased 1.4 percent after dropping 1.7 percent in the prior month. Excluding defense, new orders decreased 4.7 percent, but followed a 3.4 percent gain in February, likely reflecting a surge in orders made before the March 1 sequestration deadline. Transportation equipment, also down two of the last three months, led the decrease in Wednesday's report, falling $11.0 billion or 15.0 percent to $62.4 billion. This was led by non-defense aircraft and parts, which decreased $8.5 billion, or 48.2 percent. Weakness was widespread throughout much of the report, but defense spending on capital goods in particular fell by 33.2 percent, and defense aircraft spending fell 11.4 percent. This has ripple effects through the rest of the economy. As defense contractors order fewer parts and basic materials, demand contracts at their suppliers. Indeed, primary metals orders fell 3.0 percent after a 0.8 percent gain in February, while fabricated metals fell 1.5 percent after a 3.9 percent drop. Machinery fell 1.4 percent after a sharp 4.7 percent plunge in February. Electrical equipment was off 2.4 percent, more than reversing the 2.3 percent gain the month before. Some increased spending was apparent. Computers and electronic products increased, with this category gaining 1.0 percent, but not quite reversing the 2.3 percent February decline. The subcategories of computers as well as communications equipment gained 5.0 percent and 5.8 percent, respectively. This may reflect a bit more business investment, as well as consumer demand. For the category of business capital expenditure investments, outside of aircraft, new orders were up 0.2 percent. This is an important category, and has bounced around in the past few months, with a drop of 4.8 percent in February following a 6.7 percent jump in January. New orders here signal businesses' confidence in their companies' prospects and their willingness to expand, as well as replace aging equipment. And consumers are spending more on cars, given the combination of low financing rates and a high replacement demand because the average age of cars on the road is at a record high. Orders for automobiles increased 0.2 percent after a 4.7 percent jump in February. Because aircraft orders can drive big swings in the headline, one key metric to look at includes new orders outside of transportation. As noted above, this category has fallen by a combined 3.1 percent in the past two months, erasing the 3.0 percent gain in January. Given this information, and considering the roughly five percent decline in the heading measure in the first three months of this year, economists will likely ratchet down GDP figures both in this quarter and in coming months. Note that the drop in new orders in March will not necessarily affect first quarter GDP, as shipments, not new orders, are used in calculating GDP. Shipments of these products climbed 0.3 percent after advancing 1.2 percent in February.