U.S. Core Capital Goods Orders Plunge 1.3% Amid Tariff Uncertainty

In April, the United States witnessed a significant decline in new orders for core capital goods, a key indicator of manufacturing activity. This drop, attributed to the economic uncertainty stemming from tariffs, signals a weakening in corporate spending on equipment during the early part of the second quarter. The U.S. Department of Commerce reported that the shipment of these goods also decreased in the same month. Economists have noted that the erratic tariff policies of the Trump administration have made it difficult for businesses to plan ahead, leading to a deterioration in business sentiment.

Stephen Stanley, the chief U.S. economist at Santander, had been predicting for months that corporate investment would be a major drag on the economy this year. He attributed this to executives delaying capital projects until policies become clearer. The latest data provides the first concrete evidence supporting this hypothesis. The Department of Commerce's Census Bureau reported that non-defense capital goods orders, excluding aircraft, which is a crucial measure of corporate spending plans, plummeted by 1.3% in April. This figure was revised from a 0.3% increase in March. Economists had anticipated a slight decline of 0.1% following a 0.2% drop in March.

The shipment of core capital goods, which had increased by 0.5% in March, saw a slight decrease of 0.1% in April. Non-defense capital goods orders, excluding aircraft, dropped by 19.1%, while their shipments rebounded by 3.5% after a 1.1% decline in March. In the first quarter, companies had rushed to purchase equipment, primarily information processing equipment, to avoid price increases due to tariffs on imported goods. This surge in spending helped mitigate the drag on GDP from the import surge. However, the tariff-related "front-loading" of purchases has since subsided.

Last week, the Trump administration reignited trade tensions by proposing a 50% tariff on EU goods starting June 1 and threatening a 25% tariff on iPhones produced outside the U.S. Over the weekend, these threats were withdrawn, and the deadline was restored to July 9. While Trump views tariffs as a tool to revitalize the long-declining U.S. industrial base, economists are skeptical of this goal's feasibility. Despite a 1.0% rebound in orders for computers and electronic products, orders for communication equipment decreased by 2.6%, and orders for electrical equipment, appliances, and components fell by 0.2%. However, orders for machinery increased by 0.8%, and orders for metal products also saw an increase.

Orders for durable goods, which are expected to last three years or more, ranging from toasters to airplanes, decreased by 6.3% in April. This follows a revised 7.6% increase in March, which was initially reported as a 7.5% rise. The overall data was dragged down by a decrease in commercial aircraft orders and the waning of tariff-related "front-loading" purchases. Boeing reported receiving only 8 aircraft orders in April, compared to 192 in March. Orders for motor vehicles and parts decreased by 2.9%, and overall transportation orders plummeted by 17.1% after a 23.5% surge in March. Christopher Rupkey, the chief economist at FWDBONDS, noted that many raw materials needed for U.S. durable goods manufacturing come from overseas. Considering the tariff factor, import costs could rise significantly, making it challenging to revive U.S. manufacturing if factories cannot obtain necessary components at reasonable costs in a timely manner.