The bottom line is that January’s data on durable goods orders and shipments wasn’t as strong as expected, but we should keep in mind two facts. First off, last year these series did pretty well. Second, as I'll discuss below, several fundamental factors should boost the demand for durable goods through 2011, so let’s make sure not to place too much emphasis on a single month’s data point.
Today’s data show that durable goods manufacturing began the year on a positive, yet cautious note. Shipments of durable goods ratcheted up 0.3 percent in January, while the 2.7 percent jump in new orders follows December’s 0.4 percent decline. Across most major durable goods industries, shipments are trending upwards; exceptions include the motor vehicle industry and nondefense aircraft and parts, which have remained fairly steady, and defense capital goods, where shipments have receded by 30 percent over the year.
One the values of today's data release is that it tells us what is happening to the durable goods manufacturing sector. To refresh your memory, the manufacturing sector has been expanding for the past year and a half according to the Federal Reserve’s Index of Industrial Production [3], the Institute of Supply Management [4], and today’s data release [5]. Likewise, employment in manufacturing [6] has increased 161,000 over the past 13 months. Looking ahead, labor productivity [7] in manufacturing has increased by 11.5 percent over the past two years (wow), implying that our nation’s manufacturing firms have become more globally competitive.
Another benefit of the durable goods data release is that it tells us something about investment in new equipment by businesses. More specifically, a closely watched segment of today’s release that is tightly linked to business investment is shipments of “core capital goods.” This category includes such things as computers, industrial machinery, medical equipment and supplies, and heavy duty trucks. The shipments of core capital goods surged 12.2 percent in 2010, although shipments edged down 2.0 percent in January. Still, all indications are that shipments will continue to trend upward in early 2011. (See Figure 1) In other words, businesses are widely expected to continue to increase their investment in new equipment (in 2010, real investment in equipment increased by 15.1 percent, one of the fastest growing components of GDP last year).
Why the optimism? Well, one of the reasons why private forecasters are optimistic about investment is that the economy is expanding, and the outlook for the overall economy has been improving since late last year. Another reason is that the Middle Class Tax Relief Act of 2010 [8] is providing extra incentives for businesses to boost their capital expenditures throughout this year and next. The bill extends provisions for accelerated depreciation of investments, allowing 100 percent expensing in 2011 and 50 percent in 2012. The Administration has estimated that this bonus depreciation will spur $50 billion in added investments this year.
According to a survey by the National Association of Business Economics, 38 percent of firms had increased their capital spending during the fourth quarter of 2010 (in comparison to the previous quarter), and only 6 percent had cut back on their capital spending. Furthermore, 62 percent of firms indicated that they plan to increase capital spending this year. Small businesses are also increasingly willing to make capital outlays. According to the National Federation of Independent Businesses, 22 percent of small firms are planning a capital expenditure during the next three to six months. While still low by historical standards, this series has been trending-up from a post-recession low of 16 percent last August and is at its highest level since August 2008.
Investment in new equipment is good because it increases demand for industries that make that equipment: when demand increases for your product, then you are more likely to hire more workers and increase the number of hours worked by your existing workforce. To illustrate this point, Figure 2 shows year-to-year changes in shipments and aggregate worker hours by durable goods manufacturing industries. Aggregate hours measure the total number of hours for which payroll workers are paid, and they can increase when more workers are hired and when existing workers are given longer workweeks. In 2010, the widespread growth in shipments led factory owners both to boost workers’ hours and to bring on (or bring back) additional staff.
Figures 3 and 4 illustrate how clearly increased shipments across durable goods industries translated into increased labor demand overall as both existing staff worked longer and new staff joined their ranks. One of the biggest winners over the past year (the dot at the top right of the charts) is primary metals. A 22.6 percent surge in shipments from the fourth quarter of 2009 to the fourth quarter of 2010 led to an 11.3 percent boost in aggregate hours. This boost came as more than 20,000 steelworkers returned to work and the average workweek grew by 2.1 hours to 43.3 hours.
~Mark Doms, Chief Economist, U.S. Department of Commerce
February 24, 2011
