Durable goods orders could be a sign of optimism — or fear
Durable goods orders could be a sign of optimism — or fear
Orders of durable goods, as in long-lasting equipment, picked up in January, the Commerce Department reported Thursday.
When you set aside the volatile defense and aircraft categories, orders of capital equipment were up almost 1%. That’s the third monthly increase in a row.
Those orders can shed some light on how businesses are thinking about the economy.
A big reason economists pay attention to durable goods orders is because an order today can be a leading indicator.
“An order captures the demand for goods that will get produced and later shipped,” said Bernard Yaros, lead U.S. economist at Oxford Economics.
He said a pickup in orders is a good sign for the manufacturers that make durable goods and the companies that buy them. That’s because investing in equipment can help those companies boost productivity, “you know, especially if this equipment is being put to use to save on labor, to have more output,” said Yaros.
One reason equipment orders have been rising is because spending on advanced manufacturing facilities has skyrocketed in recent years, said Chris Varvares, senior adviser at KPMG Economics.
“These could be chip manufacturing facilities, electric battery facilities, electric vehicle facilities,” said Varvares.
And now that many of these facilities have been built, “the next step in this process would be to order and build the machines that go into these buildings to produce what they were intended to produce,” said Varvares.
But Varvares said there’s another reason businesses have been ordering new equipment. They’re nervous about tariffs, which could make that equipment more expensive. After all, equipment manufacturers in the U.S. rely on imported components and raw materials.
“And since many of these are subject to pretty sharp increases in tariffs that will add to the cost of these capital goods, many firms are wanting to get these in place ahead of the tariffs,” said Varvares.
In South San Francisco, Greg Warwick, CEO of the equipment supplier TMB Baking, said many of his customers aren’t sure whether they should buy equipment ahead of any potential tariffs.
“It’s causing some apprehension. Some of them are moving forward more quickly. Others are waiting, a wait and see,” said Warwick.
Even though some customers are buying equipment now, Warwick said his company doesn’t feel comfortable investing in new inventory or expanding.
“We’re just being conservative right now, in terms of our spending, as a result of some of that uncertainty,” said Warick.
In other words, the recent pickup in durable goods orders might not be a good sign about where the economy’s headed.
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