Surging demand for autos and auto parts pushed orders for durable goods higher in June as production continued to pick up from shutdowns, but business investment has a long way to go before normalizing.
New orders for manufactured durable goods, or items meant to last at least three years, climbed 7.3% last month from May, the Commerce Department said Monday. That followed a 15.1% rise in May and topped the 6.5% increase economists polled by FactSet predicted.
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While a second consecutive month of gains is welcome news, orders and shipments are still down about 16% and 8%, respectively, from pre-pandemic levels. What’s more, says Oren Klachkin, economist at Oxford Economics: Headline figures obscure the signal from underlying details that business investment is rebounding at a cautious pace.
A more modest 3.3% rise in core capital-goods orders (excluding transportation) indicates that businesses are still hesitant as they navigate the uncertain economic environment, he says. And while core shipments—Klachkin’s preferred gauge of business equipment investment—rose a “buoyant” 3.4%, they are still about 3% below their February level.
Klachkin cautions that durable-goods orders and shipments are unlikely to post a repeat of their strong performances in May and June in the coming months. “The sugar rush from re-openings has now faded and a resurgence of domestic coronavirus cases, alongside very weak demand, supply chain disruptions, historically low oil prices, and high levels of uncertainty will weigh heavily on business investment,” he says, adding that risks to the recovery will remain heavily tilted to the downside so long as the health situation doesn’t improve.
In terms of the broader economic recovery, though, a stall in the rebound of goods production is less important than what happens with consumers. The bulk of the hit to second-quarter gross domestic product was in consumption—not capital spending—notes Ian Shepherdson, chief economist at Pantheon Macroeconomics.
The speed of the overall recovery is ultimately much more dependent on consumer spending, and investors will get data on that front Friday when the Bureau of Economic Analysis reports June income and spending. At this point, economists expect a decline of 0.6% in income and a rise of 5.4% in spending from June.
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