Business Investment Plans Weaken
By Diane Swonk, chief economist, Grant Thornton
Durable goods orders rose 0.4% in August after rising nearly 12% in July due to a surge in defense orders; the July data were revised up. Orders excluding the volatile transportation component also increased 0.4%. Orders for aircraft and motors vehicles contracted over the month. Vehicle sales have bounced back since lockdowns started but remain well below the level hit prior to the crisis in February. Used vehicle sales reached new highs in the wake of the crisis as people scrambled to avoid mass transit during a pandemic; those gains only help new vehicle sales tangentially as they boost trade-in values.
Core durable goods, which provide us with a better sense of business investment plans, rose 1.8% in August after an upwardly revised 2.5% gain in July. The rebound in manufacturing has been uneven; the Federal Reserve’s index of industrial production is still 7.3% below the peak in February. Mining, which has struggled this year, contracted in August as production was idled in response to a hurricane and tropical storm activity in the Gulf of Mexico.
Capacity utilization at our country’s factories edged up to 70.2% in August, which is still 5.5% below the February level. Many factories are still struggling to get back to full capacity. Renewed lockdowns abroad and a resurgence of cases in the U.S. could trigger another setback this fall. Many smaller manufacturers have complained that lack of child care combined with online schooling is forcing workers to make tough decisions between working and time off.
A jump in orders for computers and communications equipment drove the increase. That reflects the slew of spending needed to keep employees working from home for longer than they ever anticipated. Retailers are also upping their investments in online operations for the upcoming holiday season, when people are likely to stay away from malls and stores.
Machinery orders posted solid gains but remained well below their peak in February. Equipment that could not be upgraded and replaced during lockdowns created a backlog in orders. Housing related construction has also surged in the wake of lockdowns, which is providing a boost for lighter weight machinery.
