KEY DATA: Orders: -2.1%; Ex-Nondefense Aircraft: -1.0%; Capital Spending: -0.9%
IN A NUTSHELL: “The growing signs that manufacturing is softening cannot be overlooked and it looks like second quarter growth could be weaker than expected.”
WHAT IT MEANS: Summer may be coming, but it’s beginning to look like winter in the manufacturing sector. Durable goods order collapsed in April, though that was expected. Boeing is seeing basically no new orders and that led to a huge 25% drop in aircraft demand. But if you take out the nondefense aircraft segment, orders were still off one percent, so we are not looking at a growing demand for big-ticket items. Still, this report was not uniformly weak. There were increases in orders for computers, fabricated metals and electrical equipment and appliances. More than offsetting those gains were declines in communications equipment, vehicles and primary metals. As for the proxy for business investment – nondefense capital goods orders excluding aircraft – orders also declined sharply. This segment has been slowing for quite some time now and it is becoming clear that whatever boom the tax cuts may have created, if they did much at all, is largely gone. And finally, backlogs declined and over the year, order books are filling much more slowly. That does not bode well for future production.
MARKETS AND FED POLICY IMPLICATIONS: A long weekend could not have come at a better time, as long as investors don’t look at their phones. I am sure there will be a whole slew of “fascinating” tweets coming out of the White House. There will be plenty of time next week to panic and then breath deeply and then panic again. But there are some patterns emerging. The first is that the manufacturing sector is flattening out. The second is that the progress that was supposed to have been made on a trade agreement with China was mostly puff with little pastry. The third is that it appears that households don’t really care that much, as long as jobs are plentiful. It’s that last point that needs to be watched, as often, changes in confidence, up or down, are not followed by modifications in spending habits. Remember, first quarter consumption was tepid, at best. It was initially assumed that the extreme weakness in durable goods spending would dissipate in the spring, but the pathetic April vehicle sales pace raises questions about whether that will happen. The May vehicle numbers are ten days out, so we can still harbor some hopes for consumers, but I am not so sure. As for the other weak link in the first quarter GDP report, business investment, it looks like it continues to go nowhere. The economic fundamentals are not strong despite solid job growth and until that disconnect is ended, we have to assume growth will moderate. Investors, though, continue to be jerked around by the president’s tweets and until that changes, all I can do is point out what the economic data mean, not what the markets may do. As for the Fed, the members’ comments show there is little agreement on what to do. So, the best thing is to punt, which is what they are planning to do.Have a safe and enjoyable Memorial Day weekend!