March spending surge on commercial planes is deceiving

There was surprisingly good economic news Wednesday about U.S. manufacturing. Orders for durable goods — that’s big-ticket items like cars, appliances, machinery, aircraft — jumped 3.2% in March on a month-to-month basis.

That’s a major turnaround from earlier in the year: Orders were down 5% in January, more than 1% in February.

Rising orders for manufactured goods are generally viewed as a good thing for the economy. The 3.2% increase in durable goods orders for March sure is huge, but there’s an important caveat. It was driven by one really volatile variable: commercial aircraft. 

One plane can cost well over $100 million, and Boeing booked 38 new orders in March, leading to an 80% jump in a single month.

“So it requires us to look under the hood every month to see what’s actually happening,” said Dan North at credit insurer Allianz Trade. Strip out volatile transportation orders down to what’s called core non-defense capital goods, he said, and last month was a lot less impressive.

“That number was actually down 0.4%, and it’s been down four out of the past five months,” North said. “And why do we look at non-defense capital goods? Well, it’s really a good proxy for business spending” on new machinery, computers, automation. In other words, investing in the future. 

And when they cut back sharply, it’s a warning, per Andrew Hunter at Capital Economics.

“The fact that it now seems to be weakening, and has been weakening for the past couple of quarters now, is unfortunately a sign, I think, that economic growth is heading lower,” he said.

To put this in context, manufacturing is only about 8% of the economy. Brad McMillan at Commonwealth Financial Network said it’s possible to have a manufacturing slump “and still see the economy as a whole continue to grow.”

Back to those rock-star aircraft orders. McMillan said they’re volatile, yes, but they do tell people something important about the economy.

“Airlines are feeling pretty positive — both about where they are and about the future,” he said. He pointed out, though, that in the past, airlines haven’t always been great at predicting the economic future. 

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