Production orders for big-ticket items such as cars and appliances fell more than expected in February. Durable goods orders fell 0.2% last month, while economists had expected orders to increase 0.3%.
But orders were stronger than in January, when orders fell 7.3%, according to revised data released today. Economists say durable goods orders are likely to pick up in coming months in response to decent consumer demand, but today's report doesn't reflect this demand yet. Orders excluding transportation rose 0.5% in February.
Boding well for future upticks is the fact that retail and manufacturing inventories have decreased sharply. If demand holds up, production will increase in coming months, helping growth. But that's the big unknown: whether or not consumers will continue to spend money. Watch for the latest consumer confidence reading, which will be released laster this monring.
The durable goods orders report is a volatile release, skewed by orders from defense and aircraft companies. Non-defense capital goods spending, excluding aircraft fell 4% after rising 3.9% in January. The rate of growth in non-defense capital goods has slowed dramatically in the past several months, and by January was contracting on a year-over-year basis, evidence of slowed manufacturing demand.
Production fell off sharply because of a rapid reduction in demand. Companies, realizing products weren't flying out the door the minute they arrived in the warehouse, ratcheted down production dramatically. What resulted was a massive buildup in inventories that had to be worked off before companies could begin to produce goods again.
The sharp increase and subsequent drawdown of inventories are responsible for some of the downturn in economic growth in the fourth quarter of last year and the first quarter of this year. But there are signs the inventory situation in manufacturing is improving, though not necessarily in tech. Inventories in the automobile industry, one of the prime drivers of growth in the manufacturing sector, have corrected sharply in the past few months.