Durable Goods Irony

Durable goods orders dropped 4.2% in March, more than twice the decline the consensus expected and the largest drop in three years.  Yet, the details are not as poor and, if anything, economists may revise up their forecasts for Q1 GDP, due out Friday. 

The key measure for GDP purposes is shipments of non-defense capital goods excluding aircraft.  This measure jumped 2.6% in March after rising 1.9% in February.    Our 2.25-2.50% estimate for Q1 GDP still seems fair. 

The forward looking element of orders, though does support our view that output has grown faster than demand and US businesses are already moving to bring them back into line, but cutting output.  Business investment is slowing after a strong 2.5 year run and this is the signal from the durable goods orders report. 

Excluding transportation (aircraft and autos), durable goods orders fell 1.1%, offsetting a good part of the 1.9% gain in February.  Transportation orders fell a dramatic 12.5% , the largest in more than a year.  This reflects an almost 50% decline in Boeing orders after a recent surge (53 planes after 237 orders in February).  Auto and auto part orders slipped a marginal 0.1%. 

Unfilled orders were little changed, while inventories rose 0.4%.   This would seem to signal the risk of further slowdown into at least early Q2.  It does not bode particularly well for the Canadian dollar and Mexican peso. 

The dollar has pared its losses in the immediate reaction, but ahead of the FOMC meeting, the market is bidding its time.  Support for the euro is seen near $1.3180.  Sterling support $1.6080.    Aussie support near $1.0320.