Durable Goods Orders Bounce Back In February

On Mar 23, the U.S. Commerce Department published durable goods orders data for the month of February. The report showed strong business spending at US factories for expensive durable items such as machinery and vehicles.

Positive durable goods orders data came as a huge relief following the retail sales decline in February, which roused fears of an impending recession. Notably, the data was also an improvement from the contraction experienced in January.

Fundamentals of the economy remain solid. Recently, the Fed revised 2018 GDP projection to 2.7% from earlier estimate of 2.5%. Investor confidence remains high buoyed by a robust labor market, low inflationary expectations and anticipation of sustained earnings momentum. At this stage, it will make good sense to invest in those stocks from the industrials arena which possess strong fundamentals.

Robust Durable Goods Data

The Department of Commerce's data showed that new orders for durable goods increased 3.1% in February after two straight monthly declines. The figure outpaced the consensus estimate of 1.7%. This strong showing can be attributed to a jump of 7.1% in transportation equipment orders. Orders for non-defense capital goods excluding aircraft grew 1.8%, reflecting biggest gain in five months.

Core capital goods shipments increased 1.4%. This was the largest increase experienced since December 2016. This metric is used for calculating equipment spending which is part of the government's GDP measurement. A jump in industrial production supported by strong demand for machineries utilized mainly in factory production clearly indicates that the likelihood of a near-term recession is uncalled for. 

Trump's Tariffs and Trade War Remain Concerns

Earlier this month, Trump imposed a 25% tariff on steel imports and 10% tariff on aluminium import to shore up these struggling industries. Many industry researchers have stated that imposition of tariffs by the United States will prompt affected countries to retaliate by imposing tariffs on U.S. products, paving the way for a full blown global trade war.

Fear of trade war has shaken the U.S. stock markets in the last week. Over the last five days, Dow 30 was down 5.7%, S&P 500 declined 2.1% and Nasdaq Composite dropped 2.4%. Consequently, S&P Industrial Select Sector SPDR XLI also declined 5.01% in the last five days.

However, spending on capital goods surged in February supported by solid business confidence, improvement in international economic growth and a weakening dollar. A cheap dollar makes U.S. manufacturing sector competitive boosting the demand for home-made goods. Notably, manufacturing sector accounts for nearly 12% of the U.S. GDP. These are the factors which are likely to outweigh trade related concerns in the weeks ahead.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report