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Key Takeaways
- Durable goods orders, which measure company purchases of heavy equipment, appliances, computers and vehicles, were up 0.1% in May, far better than what economists expected.
- However, weakness in some categories led economists to believe there are still signs of a slowdown.
- A slowdown in orders for expensive items that last three years or more could indicate the Federal Reserve’s interest rates are dragging on spending by businesses.
Orders for heavy equipment and other durable goods increased for the fourth consecutive month in May.
Durable goods orders moved higher by 0.1%, bucking economist forecasts of a decline of a full percentage point. However, new orders for manufactured durable goods in May came in weaker than revised April results , Census Bureau data showed.
Orders for aircraft, motor vehicles and computer equipment led the growth in durable goods orders. However, economists said the moderate increase showed the economy could be slowing.
While durable goods orders were higher, BMO Capital Markets Senior Economist Sal Guatieri noted a surge in defense orders helped carry the results, as non-defense capital goods orders, excluding aircraft, fell by 0.6%, the most in four months. Weak primary metals and machinery orders also dragged down the results, he said.
“Soft orders for U.S. durable goods in May confirm the economy is getting bogged down under the weight of high interest rates and a strong dollar,” Guatieri said.
The Federal Reserve’s Inflation Fight Is A Drag on Corporate Spending
The Federal Reserve’s fight against inflation is dragging on companies’ spending and that’s by design. The Fed has raised its interest rate to a 23-year high and held it there for nearly a year in an effort to discourage borrowing and spending—in turn, slowing the economy and tame inflation.
That has put a dent in companies’ capital expenditures (also known as Capex), as evidenced in Thursday’s report, and aren’t expected to get better in the second half of the year, Wells Fargo economists wrote.
“Capex conditions are unfavorable, and even if the Fed is able to lower rates later this year, we’re unlikely to see a reprieve in terms of borrowing costs until next year,” wrote Wells Fargo’s Shannon Seery Grein and Tim Quinlan. “Some further clarity in the post-presidential election environment will likely also be more supportive of demand come 2025.”