Restrained Investment amid Potential Government Shutdown

This morning, durable goods orders fell 6.1% in January, more than the 5.0% decline expected and the largest monthly drop since April 2020. Year-over-year, headline orders fell 0.6% in January, the first annual decline since August 2020.

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Transportation orders fell 16.2% following a 0.6% decline the month prior, due to a 58.9% drop in civilian aircraft orders and a 0.4% decrease in vehicle and parts orders. Excluding transportation, durable goods orders fell 0.3% in January, and increased 1.1% over the past 12 months, down from the 1.7% annual increase in December.

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Capital goods orders fell 15.0% in January. Nondefense capital goods orders, meanwhile, plunged 19.4% following a 0.1% increase in December. Capital goods orders excluding aircraft and defense – a proxy for business investment – rose 0.1% in January following a 0.6% decrease the month prior. Year-over-year, business investment increased 0.1%, down from the 0.9% annual gain in December.

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In other details, computers and electronics orders increased 1.4%, and electrical equipment orders rose 0.9% in January. On the other hand, machinery orders were flat (0.0%), fabricated metals orders declined 0.9%, and primary metals orders fell 1.7% in the first month of 2024.

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Bottom Line: A minimal rise in core capital?orders, a proxy for businesses investment, suggests companies may be increasingly feeling the weight of higher prices and borrowing costs. Additionally, amid a still positive but an uncertain outlook, potentially including a government shutdown, businesses appear somewhat hesitant, potentially restraining investment near term.?

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Also this morning, the FHFA House Price Index rose 0.1% in December, falling short of the 0.3% increase expected.

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The S&P Case-Shiller 20 City Home Price Index rose 0.21% in December, in line with the 0.20% expected gain and following a 0.24% increase in November. The National Home Price Index, meanwhile, rose 0.19% in December following a 0.25% increase in November. Over the past 12 months, the 20-city index rose 6.18%, the largest annual gain since November 2022, and the national index increased 5.57%, marking its largest annual gain since December 2022.

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Additionally this morning, consumer confidence, according to the Conference Board, unexpectedly fell from 110.9, revised lower from 114.8, to a reading of 106.7 in February, a three-month low. According to the median forecast, consumer confidence was expected to rise to 115.0. In the details of the report, a gauge of current conditions decreased from 154.9 to 147.2, a two-month low, and a gauge of future expectations fell from 81.5 to 79.8 in February, also a two-month low.

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Bottom Line: Similar to businesses curtailing investment amid a still positive?but uncertain outlook for the economy as well as monetary and fiscal policy, consumers are growing less confident.?Still relatively optimistic, the weight of current elevated prices as well as future unknowns are weighing on confidence.? ?

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Finally, this morning, the Richmond Fed Manufacturing Index rose ten points to a reading of -5 in February, the highest reading in three months. According to the median forecast, the index was expected to rise to a reading of -9.

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In the details of the report, shipments remained at a reading of -15 for the second consecutive month, while new order volume rose from -16 to -5, and the number of employees jumped from -15 to +7, a four-month high. Also, capacity utilization increased from -27 to -4, and order backlogs gained eight points to a reading of -15 in February.?

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Tomorrow, the second-round Q4 GDP report will be released. Topline growth surged past expectations in the fourth quarter, gaining 3.3%, albeit following a near 5% rise in Q3. In the second-round Q4 report, growth is expected to be unrevised at the 3.3% gain.

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Later in the week, on Thursday, policy officials will get another data point on prices with the January PCE, the preferred measure of inflation.?According to the consensus, the PCE is expected to rise 0.3% in January following a 0.2% gain in December and potentially rising 2.4% over the past 12 months, which would mark a decline from the 2.6% increase in December.

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The core PCE, on the other hand, is expected to increase 0.4% in January after a 0.2% rise in December and gain 2.8% year-over-year, potentially marking a minimal one tenth of a percentage point decline from the December pace of 2.9% and hardly the robust decline needed to convince the Committee now is the time to initiate a reduction in rates.?

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Also on Thursday, along with the PCE report, the latest look at the consumer with the January income and?consumption report.?Topline consumption is expected to increase 0.2% in January and 4.4% over the past 12 months,?down from a 5.9% pace in December. Meanwhile, personal income is expected to rise 0.5% in January and 4.2% year-over-year, down?from the 4.7% gain the month prior.

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Additionally on Thursday, the Kansas City Fed Manufacturing Activity Index will be released ahead of?the final February S&P Global U.S. Manufacturing PMI print on Friday?and the February ISM Manufacturing Index. While manufacturing activity rose two points at the start of the year, more broadly, activity in the?manufacturing sector remains lackluster. In fact, in February, manufacturing activity is expected to tick up only slightly from 49.1 to 49.5, potentially marking the 16th consecutive month in?contractionary territory, or below a reading of 50.?

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Wrapping up the week, January construction spending, along with consumer sentiment from the University of Michigan,?and total vehicle sales.?

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On the policy front, tensions in Washington remain as lawmakers continue to debate foreign aid spending. The?Biden admiration continues to?press for the Senate-passed foreign aid package, which includes roughly $74.1 billion in aid for Ukraine and Israel, as well as $9.2 billion in humanitarian aid in Gaza.?House Speaker Mike Johnson, however, and top Republicans have refused to consider the bill?in the House unless Democrats agree to domestic border reform and immigration restrictions.

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The impasse in Washington speaks to a lingering inability to compromise over funding. Since September 30, lawmakers have resorted to temporary extensions to avoid a shutdown, but funding will begin to run out as early as March 1.??

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-Lindsey Piegza, Ph.D., Chief Economist