Durable Orders Come Up Short In The Latest Troubling Sign For Manufacturing

Manufacturers' new orders for durable goods posted a modest rebound in November, driven by a surge in aircraft orders. Orders excluding transportation fell for the second time in three months. This is the latest in a string of disappointing releases from manufacturing, raising some questions about the health of one of the key drivers of freight demand headed into next year.

The Census Bureau reported this morning that manufacturers' new orders for durable goods increased 0.8% in November from October's levels. This comes on the heels of a 4.3% decline in the previous month and falls short of consensus estimates of a 1.6% gain. The fluctuations over the past couple of months have been caused by swings in the volatile transportation equipment component, which often experiences non-seasonal surges in aircraft orders. Excluding transportation equipment, durable goods orders actually declined by 0.3% as year-over-year growth remained below 5%. Core capital orders, which are a proxy for business investment spending on equipment, fell by 0.6% during the month.

Durable goods orders serve as a useful leading indicator of future durable goods shipments, typically leading shipments in the economy by 1-2 months. Orders excluding aircraft have now declined in two out of the last three months, heightening concerns over the future strength of manufacturing activity. Durable goods manufacturing has been one of the standout areas in terms of industrial output throughout the year, and a significant slowdown in durable goods production would further restrain overall factory output.

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Durable goods orders are a leading indicator of shipments ORDR SHIP.DGXT)

More manufacturing softness

The results from durable goods orders are just the latest in a series of weak results emerging from the manufacturing sector over the past week. The industrial production release from last Friday revealed that manufacturing activity stalled in November, and revisions to previous data showed that the sector grew slower than initially reported.

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Manufacturing growth has already decelerated IPROG

Early signs from December have also indicated a slowdown in manufacturing activity. Earlier this week, the New York Federal Reserve released its Empire State Manufacturing Index, showing that manufacturing growth in New York State fell to the slowest pace since mid-2017. These results were echoed by the Philadelphia Fed's manufacturing activity index, which slumped to its lowest point since 2016.

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The resurgence of U.S. manufacturing activity has been one of the highlights in the economy over the past couple of years, and has helped drive significant growth in freight demand. Concerns over tariffs, slumping global growth, weakening investment demand, and the strengthening U.S. Dollar have become headwinds for the manufacturing sector, however, and all signs are pointing to slower growth in manufacturing activity to round out the year.

Behind the numbers

The headline number this morning was respectable, but the details here in this morning's report were far less favorable for the outlook. The disappointing showing in core capital goods suggests that investment demand in the economy is petering out as we reach the end of the year. With oil prices down below $50/barrel and businesses wrapping the effects of the 2018 tax cuts, investment demand is likely to be even weaker next year.

Things right now look quite similar to the end of 2014, which was a strong year of growth in the manufacturing sector. In the 2nd half of that year, global growth began to slow, the value of the dollar appreciated quickly, and the price of oil tumbled. The result was a manufacturing sector that went into decline, bringing down freight demand with it. Here, the appreciation of the U.S. dollar has not been as strong and the crash in oil prices has not been as severe. Still, this is not good news for the sector, and manufacturing growth looks to be quite a bit weaker next year, even if manufacturing does not enter into a period of decline.

Ibrahiim Bayaan is FreightWaves' Chief Economist. He writes regularly on all aspects of the economy and provides context with original research and analytics on freight market trends. Never miss his commentary by subscribing.

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