U.S. durable goods orders weaken in May; downside risks to business spending outlook re-ignite

U.S. durable goods orders dropped 2.2 percent in May, weaker than projections. Core capital goods orders also came in weaker. Meanwhile, data for shipments indicate towards positive spending in equipment in the second quarter; however, risks have been ignited again, noted Wells Fargo in a research note.

Adding on to the worries regarding the near-term growth outlook of the U.S. in the wake of the UK’s vote to exit the EU, is the recent read on the nation’s factory sector. The market projections were for a decline of 0.5 percent in the durable goods order. The Brexit decision has renewed certain risks on the downside to the business spending outlook.

The weaker global economic growth, lower commodity prices and the stronger dollar had posed as headwinds that challenged capital goods orders in the last year and in early 2016 had been alleviating in the last few months, resulting in anticipating that equipment spending might become positive after dropping in  the past two quarters, said Wells Fargo.

The UK’s vote to leave the EU leads to renewing these risks. Even if the US dollar’s and oil prices’ overnight moves might be overstated, the direction is telling. The US dollar has strengthened over 2 percent against a major basket of currencies, while oil prices have also dropped that implies persistent pressure on commodity-related equipment’s producers. For the nation’s industrial sector, the global demand outlook appeared weaker than earlier, given the increased uncertainties regarding the economies of U.K. and euro area, according to Wells Fargo.

Delving into durable goods orders details, strong defence orders in the earlier two months mainly led the decline in May, with others declining 28 percent. The softness in defence orders was mainly focused on aircraft that pushed down the total transportations orders down 5.6 percent. Nondefense aircraft orders seemed slightly firmer that grew 1 percent in May. But orders for vehicles and parts remained weak, declining 2.8 percent. The drop follows a deceleration in sales and higher inventories at retail dealers in the last two months.

Fall in core capital goods orders was quite worrying. Nondefense capital goods orders, stripping aircraft, dropped 0.7 percent. This was the third consecutive decline in four months. Orders, on a three-month average annualized basis, declined 3.3 percent. However, this shows an improvement in the trend that implies that the tide might be turning, added Wells Fargo.

Shipments of nondefense capital goods provide certain signs that spending in equipment might still be positive in the second quarter. This category’s shipments grew 1.2 percent in May. Moreover, new orders for core capital goods continued to be weak in May, whereas unfilled orders grew slightly.