Weather slams U.S. business equipment spending, while supply disruptions weigh

Key Points
  • New orders for key U.S.-made capital goods fell in February after nine straight monthly increases.
  • The data suggested some cooling in business spending on equipment in the first quarter.
  • Orders for durable goods, items ranging from toasters to aircraft that are meant to last three years or more, decreased 1.1% in February after jumping 3.5% a month earlier.
U.S. durable goods orders fell 1.1% in February
U.S. durable goods orders fell 1.1% in February

New orders for key U.S.-made capital goods and shipments unexpectedly fell in February after nine straight monthly increases, but a rebound is likely as factory activity picked up early this month amid warmer temperatures.

The weak report from the Commerce Department on Wednesday joined a stream of other data in showing severe disruptions to economic activity wrought by last month's deep freeze, including in Texas and other parts of the densely populated South region.

Economists are maintaining their lofty first-quarter gross domestic product growth estimates. Warmer weather, the White House's $1.9 trillion Covid-19 pandemic rescue package and increased vaccinations are expected to boost activity in March.

"While the February figures have disappointed, there is nothing to be too concerned by," said James Knightley, chief international economist at ING in New York. "Consumer spending is expected to rebound strongly in March and April on the latest stimulus payments, manufacturing will roar back given the strong order books and low inventory levels."

Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, dropped 0.8% last month. These so-called core capital goods orders gained 0.6% in January. Economists polled by Reuters had forecast core capital goods orders would rise 0.5%.

Core capital goods orders surged 8.5% on a year-on-year basis in February. The year-long coronavirus pandemic has boosted demand for goods, underpinning manufacturing, which accounts for 11.9% of the U.S. economy.

A survey from data firm IHS Markit on Wednesday showed its flash U.S. manufacturing PMI increased to 59 in the first half of this month from a final reading of 58.6 in February. A reading above 50 indicates growth in manufacturing. The survey's new orders measure jumped to the highest since June 2014.

But manufacturing is struggling with supply chain disruptions caused by the pandemic.

U.S. stocks were trading largely higher. The dollar edged up against a basket of currencies. U.S. Treasury prices also rose.

Broad weakness

In February, core capital goods orders were weighed down by machinery and primary and fabricated metal products, as well as computers and electronic products. But orders for electrical equipment, appliances and components rose 0.2%.

Shipments of core capital goods dropped 1.0% last month. Core capital goods shipments are used to calculate equipment spending in the government's GDP measurement. They increased 1.9% in January.

Last month's decline suggests a slowdown in business investment on equipment this quarter after double-digit growth in each of the last two quarters.

The economy is forecast to grow by as much as a 7.5% annualized rate in the first quarter after expanding at a 4.1% pace in the final three months of 2020.

"The simple reality is that the economy is in good shape and almost everything is moving in the right direction," said Joel Naroff, chief economist at Naroff Economics in Holland, Pennsylvania. "The stimulus is hitting consumer bank accounts, vaccinations are ramping up and, at least until recently, virus cases and especially deaths were trending downward."

Orders for durable goods, items ranging from toasters to aircraft that are meant to last three years or more, decreased 1.1% in February after jumping 3.5% in January. They were pulled down by a 1.6% drop in orders for transportation equipment, which followed a 7.5% surge in January.

But orders for civilian aircraft soared 103.3%. Boeing reported on its website that it had received 82 aircraft orders last month compared to only four in January. That included 39 orders for the 737 Max jets. The U.S. government late last year lifted a 20-month grounding of the aircraft that was put in place after two crashes in Indonesia and Ethiopia.

Orders for motor vehicles and parts tumbled 8.7% in February after falling 0.9% in January. Motor vehicle production has been hit by a global semiconductor chip shortage. Output of computers and electronic products also has been impacted.

"The biggest headwinds for manufacturing as we emerge from this pandemic are mostly about manufacturers getting the stuff they need," said Tim Quinlan, a senior economist at Wells Fargo Securities in Charlotte, North Carolina. "The downside of that is price pressures and the potential for profit squeeze."

Indeed, the IHS survey's measure of prices paid by manufacturers raced to a 10-year high early this month, amid what the data firm said was the "most severe supply chain disruption on record." It said firms "commonly reported slower output growth" due to raw materials shortages.