US: Glimmers of hope in the gloom

US durable goods orders fell 17.2% month on month in April, which was less than consensus expected, but with downward revisions to the history, the US dollar level of orders is broadly in line with expectations. The bulk of the hit was in autos and parts, which saw orders fall 52.8% – understandable given the shutdowns in production. Defence orders fell 30.8% and non-defence aircraft fell 46.9%.

However, there is some good news in that the so called “core” figure – non-defence capital goods orders ex aircraft, which is viewed as a decent lead indicator for capital expenditure, didn’t fall quite as much as feared. It dropped by only 5.8% versus the 10% fall expected and thereby offer some optimism that firms are perhaps not retrenching particularly aggressively – especially relative to the Global Financial Crisis.

Nonetheless, it is early days and the hit to corporate profitability caused by the Covid-19 crisis could mean that firms remain reluctant to replace older equipment, particularly as capacity utilisation remains so low. As such there is scope for further declines over coming months. Aircraft orders are also likely to remain weak given the troubles faced by the airline industry, but we are hopeful that auto-related orders will pick up given the re-opening of car plants and evidence suggesting that car sales are recovering.

In this regard we need to recognise that just like housing, the typical new car buyer is in their late 40s and is less likely to be impacted by job losses in the leisure, retail and hospitality industries. Given the financing incentives available right now there are deals to be had that can support demand for output.