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Key Takeaways
- Orders for durable goods made by U.S. factories surged in July, driven by a rebound in aircraft orders that had plummeted in June.
- Setting aside transportation orders, which tend to be volatile, orders decreased in most categories.
- Durable goods orders, as a barometer of the overall economy, showed that the Fed’s high interest rates, meant to combat inflation, are weighing on economic activity.
Demand at U.S. manufacturers is soaring if you include aircraft — and stalling if you don’t.
That’s according to the Census Bureau’s report Monday on July durable goods orders in, which showed manufacturers received 9.9% more orders than they did in June. That number blew past forecasters’ expectations for a 4% monthly increase, according to a survey of economists by Dow Jones Newswires and The Wall Street Journal.
Transportation Orders Inflate Overall Measure
If you leave out transportation—a category that’s prone to wild swings each month—orders actually fell 0.2%, suggesting that U.S. industry is losing momentum.
Much of the monthly increase was caused by a rebound in orders for civilian aircraft, which bounced back after many customers canceled orders in June. If the rest of the report is a better barometer for the economy’s direction, it showed that high interest rates on all kinds of loans—a consequence of the Federal Reserve’s campaign of rate hikes to combat inflation—continued to be a drag.
The Federal Reserve Could Relieve Some Pressure on Businesses
Companies may be putting expansion plans on hold, waiting for Fed policymakers to cut the central bank’s benchmark interest rate when they next meet in September, as they are widely expected to do. A lower fed funds rate could push down borrowing costs for businesses and individuals and spur more borrowing and spending throughout the economy.
“We suspect a rebound in capital expenditures is coming as the Federal Reserve begins reducing its target range for the federal funds rate, but it will take some time for the accommodation of lower interest rates to filter through to the real economy,” Shannon Seery Grein and other economists at Wells Fargo Securities wrote in a commentary. “Today’s data confirm the ongoing trend that manufacturers are largely standing idle until looser policy comes to fruition and supports broad-based order demand.”
Monday’s data showed orders faltering for an array of categories including electronics, metals, motor vehicles, and appliances.
“Equipment spending remained subdued as corporate spending plans continue to work around the significant headwinds posed by elevated interest rates and weak domestic and international demand,” Daniel Vielhaber, economist at Nationwide, wrote in a commentary. “In fact, there were no significant areas of strength when looking beyond commercial aircraft.”