Vehicles Drive Factory Gains

By Diane Swonk, chief economist, Grant Thornton

Durable goods orders surged nearly 16% in May after contracting more than 18% in April. A 27.5% jump in vehicle orders drove those gains. Primary and fabricated metals orders were not too far behind.

Vehicle sales came back rapidly after dipping during the lockdown. Wealthy households were able to upgrade as vacation plans were put on hold. Used car sales have also done well in response to stimulus checks, which boosted trade-in values. It is notable that orders remained significantly lower from a year ago in May.

Capital goods orders excluding aircraft and defense orders rose 2.3% in May after falling 6.5% in April. That’s a good measure for business investment plans, which, although they increased for the month, they are still down from a year ago.

Capital goods shipments excluding aircraft and defense moved up 1.8% for the month after sliding 6.2% in April. This category tracks actual spending by businesses and suggests that business investment, notably in the vehicle sector, is climbing out of a hole but still well below year-ago levels. Note: Business investment started to contract a year ago in the second quarter of 2019 when trade tensions and tariffs escalated.

One of the primary concerns this summer is a new trade war launched by the administration. The support for tariffs on China is bipartisan, as just about everyone is angry with China’s handling of COVID-19 pandemic. The White House has also attacked the European Union (EU), which for a few more months includes the U.K. Tariffs could be as high as 100% on $3.1 billion of luxury goods and alcohol coming in from the EU. Aluminum tariffs are on the table despite significant pushback by the aluminum industry in the U.S.

Bottom Line

A trade war resulting in retaliation would add insult to injury for a fragile recovery. The manufacturing sector is displaying modest signs of recovery on a month-by-month basis, but demand for durable goods remains sharply lower from the same time one year ago. The manufacturing sector is much safer to reopen than the service sector, given a lower rate of infection and more space on factory floors for social distancing. The only exception is meat processing plants, which have been hit hard by COVID the world over due to close working conditions.