US: Core capital goods orders on the mend - Wells Fargo

Today’s report showed that durable goods orders rose 3.1% in February, after falling during the previous two months. According to analysts at Wells Fargo, even with the rebound, business spending looks to have slowed during the first quarter. 

Key Quotes: 

“Capital spending and output measures were notably weak in December and January, which has raised some doubts about the outlook for business spending despite all the euphoria surrounding recent tax changes. The state of business spending, however, looks much stronger following the February durable goods report.”

“Durable goods orders rose 3.1 percent in February, nearly double consensus expectations. While it is not unusual for total durable goods orders to miss so wide off the mark given notoriously large and volatile components like aircraft and defense items, February’s miss can in large part be traced to a surprisingly strong increase in core capital goods orders.”

“For months now, we have written that the “hard” data on spending must converge with the sky-high readings of “soft” survey data. Business confidence, as measured by the NFIB Small Business Optimism index, has been at multi-decade highs, while the ISM manufacturing index sits at a 14-year high. Today’s report helps to narrow the gap, but the recent trend in orders still looks soft relative to the breakneck pace registered last fall. With a decline the previous two months, core orders are increasing at just a 0.6 percent annualized pace the past three months, which is down from an 18 percent clip as recently as November.”

“Even with today’s solid rebound in core orders, it is unlikely we will ee a third straight quarter of double-digit increases in equipment spending. We currently expect growth in real equipment spending to moderate to about a 7 percent pace in first quarter, which still looks fairly solid in our view coming on the heels of the tremendous strength of the second half of last year.”