Durable goods orders fell across the board by 1.1% in February, and capital goods orders (excluding defense and aircraft) fell by 0.8% – not dramatic numbers, but baffling nonetheless.
US manufacturers say that their biggest problem is supply chain constraints. If that’s true, why aren’t they buying equipment?
The Chart of the Day shows US durable goods orders ex-transportation in 1982 dollars. On a 12-month rolling basis, orders are down about 10% from the 2018 peak (before the Trump tariffs and before Covid-19). February orders, which were down slightly from January’s, haven’t even gotten to the previous peak.
The one-word answer is “stagflation,” as I argued in a March 20 analysis.
The Philadelphia Federal Reserve’s survey of February business conditions showed a scissors opening between prices paid by manufacturers and prices received. Prices paid rose at the fastest rate since the 1970s, and the gap between the cost of inputs and the price of finished goods widened to the widest since the 2009 financial crash.
That’s the “stag” part of “stagflation.” Inflationary impulses may not translate into higher finished good prices, if the final buyer balks at paying a higher price. Instead of absorbing the loss, businesses will contract operations, and the inflationary impulse causes stagnation.
That can become a vicious cycle: Manufacturers fear for profitability, so they don’t invest and supply constraints get worse.
“The expansion was largely driven by service providers, as input shortages and supplier delays limited the expansion of manufacturing production capacity,” HIS-Markit, which publishes a monthly survey of US purchasing managers, wrote on March 24. “Capacity pressures stemming from extensive supply shortages constrained manufacturing output growth to the slowest for five months.”
Service industries continue to expand, although from a very low base. Payroll employment remains 10 million lower than it was before the Covid-19 pandemic began a year ago.
