“Despite dire warnings from economists, Mr. Trump’s trade war has so far done little to derail the decade-long recovery from the Great Recession. Economic growth has remained strong, and the unemployment rate last month low. But evidence is mounting that the conflict has taken an economic toll.” (Ben Casselman, NYT, May 30,2019)

New orders for US-made capital goods fell more than expected in April, providing further evidence that manufacturing and the broader economy were slowing in Q2 after an unusual growth spurt in the first quarter.

The capital goods sector. which accounts for about 12% of US GDP, is being squeezed by businesses placing fewer orders because they are trying to reduce unsold inventories.

The inventory overhang is concentrated in the auto sector and Boeing’s move to cut its production of its troubled 737 Max aircraft.  The recent escalation of the trade war between the US and China is making matters worse.

US durable goods orders slumped 2.1% in April, and nondefense aircraft and parts dropped a significant 0.9% in the month.

Over the three months ending April, new orders declined at an 11.5% average annual rate, and there was virtually no growth in new orders over the previous twelve months. The shipments of durable goods were also very weak over the past three months.

Non-defense capital goods excluding aircraft is regarded as an important proxy for business spending plans, and this proxy has declined at a 1% annual rate over the last three months.

American firms are clearly unwilling to invest in durable goods equipment because of the uncertainty over the trade war, the impact of potentially higher tariffs in the future, and even tight labour markets. Of course, the negative outlook for durable goods will affect GDP and ultimately employment as well.

The American economy grew at a 3.2% annual rate in the first quarter, but the latest poor durable goods numbers are consistent with the economy growing significantly slower in the second quarter, perhaps at a pace below 1.5%.