The monthly durable goods orders report is due out during the NY trading session today. According to the economists polled, growth in durable goods orders excluding defense purchases is set to slow in April.
The data comes at a crucial time when the US has ramped up its trade war rhetoric against China. Increased tariffs from 10% to 25% and a retaliatory response from China are likely to dampen demand in the near term.
The data for April will potentially shed a light on the second quarter GDP report. Some of the sub-measures of the durable goods orders are signaling that growth has likely reached its peak.
Durable Goods Orders to Retreat from March Highs
Estimates show that durable goods orders excluding defense spending could rise 0.2% on the month. This follows the same pace of increase in March.
Durable goods orders excluding defense for March initially came in at 0.4%. But, later, they were revised to show a 0.2% increase. Expectations are for headline durable goods orders to post a decline of 1.7% for April.
This follows the 2.6% increase in the report covering March. Nondefense capital goods excluding aircraft are forecast to rise 0.1% following a 1.0% increase previously.
The decline in the durable goods orders comes after they rose to an eight-month high just the month before. The broader measure of durable goods orders saw some surprise uptick with corporate investment rising despite trade tensions.
Non-military capital goods which are a proxy for business investment grew at a pace of 1.3% in March. This reversed the declines from the prior month.
A rise in demand for finished goods saw manufacturers increasing their activity during the month. But larger inventories will continue to play their role in the months ahead.
Manufacturing activity has remained subdued. Recent data from the Institute of Supply Management saw business activity in the manufacturing sector easing. This could potentially affect the figures for April.
In April, durable goods capacity utilization was 75.3%, which was the first month that capacity utilization was below 76% since July 2018. Compared to one year ago, capacity utilization decreased by 0.9%, marking the first month of contraction since December 2016. Capacity utilization over the past five months has also been trending lower.
U.S. Industrial production
Aircraft and Vehicle Orders Expected Lower
Posing a drag on the durable goods orders, aircraft orders from Boeing (NYSE:BA) and weaker vehicle sales hint towards the smaller pace of growth. The auto vehicle sales for April disappointed expectations. Economists expected to see a rebound in auto sales following the rebound in March.
The rebound in March vehicle sales reversed the declines from the previous two months. And economists expected it to continue into April. New vehicle sales dipped 2.3% on the month in April to 1.33 million. The declines in vehicles came despite an extra day during the month, compared to the same period in the month before.
New orders for Aircrafts fell sharply in April. Boeing reported that there were literally no new orders for aircrafts in April. This comes following the scandal surrounding the Boeing 737 Max aircraft.
Because Boeing is a major contributing factor to overall retail sales including aircraft orders, this could potentially take the air out of the durable goods orders report.
A weaker report could possibly lower the expectations of the second quarter GDP numbers. Various trackers currently estimate the US GDP shows an average growth between 1.7% – 2.0%. The median consensus currently puts the second quarter growth rate at 1.9%.
This could potentially be revised lower if the durable goods orders post an unexpected decline for April.
Noting the above, today’s durable goods orders report is likely to show a weaker pace of new orders coming through in April.