Implications: A drop in commercial aircraft orders in April – following large gains in February and March – overshadowed an otherwise healthy durable goods report. Excluding the typically volatile transportation sector, orders rose 0.9% in April as nearly all major categories showed gains, led by fabricated metal products and electrical equipment, appliances & components. More importantly, and even including downward revisions to prior months, the trend in orders (both including and excluding transportation) continues to show a pickup in the pace of activity. This is in part due to the shift to full tax expensing of business investments instead of depreciation over several years, paired with tax cuts that increase the value of new business projects. We expect these will continue to serve as a tailwind (particularly for machinery orders) through the remainder of 2018 and into 2019. Among the best news in today's report was a 0.8% increase in shipments for non-defense capital goods excluding aircraft. If unchanged in May and June, these "core" shipments – the calculation most relevant to government calculations of business investment for GDP purposes – will be up at a 2.9% annualized rate in Q2 versus the Q1 average. Unfortunately, today's report also included downward revisions to first quarter data, which, paired with other economic data since the initial estimate, suggests real GDP growth of 2.2% in the first quarter, down from the government's initial estimate of 2.3%. As we noted in a recent Monday Morning Outlook, don't view moderate first quarter growth as a sign that the economy isn't picking up pace. It is. We are still penciling-in a 4.0% growth rate in Q2 and anticipate average growth of around 3% for 2018. In sum, today's report of healthy economic growth gives yet another reason investors should be feeling optimistic heading into the holiday weekend. So enjoy the long weekend, remember those that have fought to protect our freedom, and rest easy knowing the economy is doing fine.
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Posted on Friday, May 25, 2018 @ 10:11 AM
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