Durable goods orders surged 3.4% in April after being revised up significantly for March. A 64.9% jump in orders for airplanes accounted for much of the unusual strength. Aircraft orders have long lead times, contribute little to current investment, and can be canceled on a whim.
The auto industry also provided support for the gains. Gains in the vehicle sector are expected to remain strong in the near-term. Aggressive financing incentives, leasing deals, and fleet sales are boosting gains in the near-term. Those strategies, however, have haunted the industry in the past and could be setting the stage for a fall down the road.
The more telling statistic is capital goods orders excluding defense and aircraft, which more closely tracks business investment; it dropped by 0.8% in April, which compounded two previous months of declines. This bodes poorly for business investment over the summer. The lack of business investment has been one of the most disturbing aspects of the expansion, as it is undermining the foundation for growth going forward. Productivity gains, in particular, have become disturbingly weak, an issue that Fed President Bullard highlighted in comments this morning. The only way to regain what we have lost in living standards is to see an improvement in productivity growth and wages.
Core capital goods shipments were a little better, rising 0.3% from March. That followed two months of declines, however, is still doesn’t do much to suggest investment is actually picking up in the near-term.
Bottom Line: One of the most disturbing phenomena of the current expansion has been a lack of investment. Companies awash in cash and with cheap credit are re-deploying those resources to increase dividends and boost their stock prices via stock buybacks instead of investing in the future. The unwillingness to invest in infrastructure, however, is disturbing and needs to be watched. Without more infrastructure investment, productivity growth, and the growth potential of the economy will suffer.
That said, the shortfall in investment is nothing new and will not stop the Fed from raising rates. We are putting more than a 50% chance on a June rate hike. The division between Hawks and Doves on a rate hike in June or July has narrowed considerably in recent months; they are all singing in unison for a rate increase.