Factory activity in America remains subdued, according to a handful of recent data releases. For example, orders for U.S.-manufactured durable goods (items meant to last at least three years) fell in April by 2.1 percent, according to the Census Bureau. That was slightly better than expected and most of the headline weakness was due to a 25.1 percent plunge in bookings for civilian aircraft and parts. The grounding of the 737 MAX planes and related negative headlines have resulted in many order cancellations, but this could quickly reverse once Boeing has a definitive fix in place. “Core” durable goods orders, though, which exclude the volatile transportation component, were flat in April and year-over-year growth fell to 30-month low. Further, orders for nondefense capital goods excluding aircraft, i.e. core capital expenditures, an important proxy for U.S. business investment, unexpectedly declined for the first time this year.
Clearly the recent weakness in the factory sector is more than just an aircraft story, and some of the other factors likely weighing on production include heightened trade frictions, sluggish global growth, a waning tax cut bump, and the overhang from an earlier inventory buildup. Following the release of the somewhat disappointing durable goods report, analysts at the Federal Banks of Atlanta and New York lowered their forecasts for U.S. gross domestic product growth in the second quarter of 2019 to around 1.3-1.4 percent. That would be a marked, albeit expected, slowdown from Q1’s brisk 3.1 percent increase. Looking ahead, most regional gauges of manufacturing activity stabilized or even improved in May, but the Dallas Fed’s index was updated later in the month (after the recent escalation in the trade war) and instead deteriorated to the weakest level of 2019. An elevated number of managers in the 11th Fed district complained about tariffs and the ongoing trade dispute, but a separate survey showed that a shortage of skilled workers and resulting upward pressure on labor costs remain major challenges as well. Altogether, manufacturing activity in America continues to expand but at a slower rate. The breadth of the recent weakness provides more evidence that the trade war is an unneeded headwind and the sooner an accord can be reached between the United States and China the better.
Sources: Econoday, U.S. DoC, FRBA, FRBNY, FRBD, FRBSL
Post author: Charles Couch