KEY DATA: Orders: -0.6%; Excluding Aircraft: -0.5%; Capital Spending: -0.2%/ Pending Sales: -0.5%; Over-Year: -2.2%
IN A NUTSHELL: “The manufacturing sector is still growing, but maybe at a less robust pace.”
WHAT IT MEANS: One of the highlights of the current expansion has been the rebound in manufacturing. Well, that upturn may be moderating. Durable goods orders fell in May, marking the second consecutive monthly drop. Declines were pretty much across the board as the vehicle, civilian aircraft, computer, electronic equipment and metal sectors all were off. Demand for machinery, communications equipment and defense aircraft did increase. Still, backlogs rose sharply, indicating that production will continue to be strong for quite some time. Slowing vehicle sales and building inventory is not good news for the auto sectors. Finally, capital spending also slowed a touch. While the tax cuts provided the means of invest, firms have not done so consistently as spending has been up and down like a yo-yo this year.
The National Association of Realtors reported that pending home sales were off in May. Weakness in the South, the biggest region, offset gains in the other three regions. Housing’s big problem is not demand, as prices are up sharply. It is a lack of inventory that is restraining sales and that is likely to continue to be an issue for quite a while.
MARKETS AND FED POLICY IMPLICATIONS: The housing sector is being buffeted by a lack of homes on the market, rising interest rates and soaring prices. That combination does not make for a stable market. The recent moderation in rates should help, but if growth is as strong as most economists expect, inflation and longer-term interest rates should continue to filter upward over the course of the year. And the Fed has made it clear that short-term rates will be rising as well. So, don’t expect this sector to lead the way. In addition, the rising costs to manufacturers from tariffs is just starting to bite and while initially, those costs might be absorbed, there is only so much some of the businesses can stand. We could see them raising prices as long as those tariffs are maintained. As for U.S. firms facing tariffs put on American made products, those impacts are also in the beginning stages. Thus, while the economic fundamentals are strong, some cracks are beginning to appear. Ultimately, investors will have to decide how much of the threats are real and how much bluster. They cannot keep getting whipsawed. Until then, volatility is likely to continue.