Durable goods orders fell 1.2% in October, giving up a portion of the upward 2.2% swing in September. Much of that weakness may be attributed to a drop in volatile aircraft orders, which fell 18.6% in October after surging more than 30% during the previous two months. Capital goods orders excluding defense and transportation fell 0.5% in line with expectations. The core capital goods component of the survey provides a measure of confidence that businesses have in making investments. The manufacturing sector, in particular, lost ground in October following two solid months.
Core capital goods shipments, which track business investment on a real-time basis, actually increased by 0.4% in October. That bodes well for business investment in the fourth quarter and suggests that strong growth abroad and tightening labor markets are finally pushing businesses to invest. The trend in business investment has been long in coming but is welcome news given the dearth of investment during much of the post-crisis era. The economy has finally gained enough traction for businesses to bet on the future.
It is notable that the uptick in investment is broad-based and less concentrated in just one industry – oil – than we saw earlier in the cycle. In fact, that investment has abated since producers are now being forced to provide returns their investors. This raises the odds of a meaningful increase in productivity growth in 2018, which would support an acceleration in wages.
Bottom Line: Business investment is stronger than the headline on durable goods orders appears. They are willing to invest in response to stronger underlying economic conditions, even before any changes to the tax code.