Data released on Thursday showed an unexpected decline in durables goods orders in April. According to analysts at Wells Fargo, the 1.3% drop in durable goods orders reflected supply chain issues continuing to snarl up auto production and a sharp drop in defense spending.

Key Quotes: 

“The 1.3% drop in durable goods orders in April reflected supply chain issues continuing to snarl up auto production and a sharp drop in defense spending. Hidden under the headline was an impressive 2.3% increase in core capital goods orders in a sign that broad capacity constraints are supporting new investment. That could take the edge off some recent inflationary pressures and support the Fed’s view that the current pace of inflation is temporary, and that the supply side of the economy will adjust to meet the impressive demand environment.”

“The strong performance of capex spending should contribute to current inflation pressures dissipating ahead, and support the Fed’s current thinking that the supply-side of the economy will adjust and bottlenecks should ease over time.”

“The fact that both core capital goods orders and shipments are growing is a positive development, although orders outpacing shipments may also be another clue that material, parts and labor shortages could be holding up deliveries.”

“The coming months will likely highlight the shortages and imbalances in our view and cause some of these bottlenecks to hold up production. Once again, motor vehicles production is likely to be the poster-child of this dynamic.”

“To the extent that the recent quickening in core capital goods orders signals a ramping up in equipment investment to address supply constraints, there may be a broadening in the base of manufacturing output which could offset some of the expected drag from motor vehicle production.”
 

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