Durable goods fell 2.8% in February, after gains for January were revised down a bit. A fallback in the highly volatile aircraft sector accounted for some but not all of the weakness. We also saw declines in machinery and primary metals, which have been hit hard by the bust in the oil sector. Primary metals, which includes the steel industry, has been hit hardest by the drop in investment in the shale industry.
The only real bright spots in the report were the vehicle sector, which remains on an upswing. A rise in subprime defaults in vehicle loans, however, has raised questions about how much consumer demand we can continue to finance in the vehicle sector. Leases are becoming more popular again, which vehicle producers prefer over long-term financing, as they ensure trade-in demand. They also provide quality used car alternatives for buyers who can no longer afford to buy new. The other bright spot was computers and related products, which posted its second consecutive month of gains, after a miserable 2015.
Core capital goods orders (those excluding defense and aircraft) which more closely track business plans also fell for the month. The losses were not as rapid as the declines in overall orders but weak enough to be worried. More importantly for growth in the first quarter, core shipments fell for their second consecutive month, which means we could see another weak quarter for business investment.
Bottom Line: The ripple effects of low oil prices on investment in the oil sector are still playing out, with production as well as investment now falling. This was one of the few positives outside of the auto sector carrying investment in recent years, and will weigh on overall growth in the first quarter. More importantly, lackluster business investment appears to be taking a toll on productivity growth. This is hurting our ability to regain the losses in living standards and undermining the foundation for overall growth going forward.