U.S. Durable goods orders and shipments increased in May, but remained well below pre-COVID-19 levels

*U.S. durable goods orders (+15.8% m/m) and shipments (+4.4% m/m) both increased in May, but remained well below February’s levels (orders: -21%, shipments: -19.7%), indicating the start of a long recovery for the manufacturing sector (Chart 1). May was a transition month for factories that were allowed to resume operations -- the improvement in regional manufacturing sentiment indexes point to a stronger rebound in durable goods shipments in June.

*Shipments of nondefense capital goods ‑- a proxy for business equipment investment in GDP ‑- barely increased in May (+0.4%), after a massive 13.3% m/m decline in April, and are on track to fall by 49% q/q annualized in Q2 (Chart 2).

*Headline durable goods orders were boosted by the 80.7% m/m increase in transportation orders that had declined by a cumulative 70.8% in March and April. Orders of nondefense capital goods excluding aircraft, a reliable gauge of underlying manufacturing demand, increased by 2.3% m/m, remaining 5.6% below February’s level (Chart 3).

Eight of the nine primary categories of durable goods shipments increased in May, with shipments of aircraft and parts the lone exception (-13.1% m/m). Since February, shipments of communications equipment (+3.8%) and computers and related products (1.7%) have actually increased, far-outperforming other categories and consistent with broader economic trends during the COVID-19 pandemic (Chart 4). Shipments of motor vehicles and parts (-52.3%) and aircraft and parts (-46.7%) remain furthest below the February levels (Chart 5).

Durable goods inventories increased by a slight 0.1% m/m, leaving the inventory-shipments ratio at an elevated 2.14, the second highest on record (Chart 6). The ratio should fall further in June as shipments rebound at a faster pace.

Manufacturing sentiment measures point to a stronger rebound in factory activity in June: 1) The Philly Fed manufacturing sentiment and Empire State manufacturing sentiment indexes surged by 70.6pts and 48.3pts, respectively, to 27.5 and -0.2 in June (Chart 7); and 2) and the Markit U.S. manufacturing PMI increased by 9.8pts to 49.6, just missing expansion territory (>50). After the initial rebound in manufacturing activity, we expect the recovery to be slow as disruptions to global supply chains will continue to affect production processes, businesses face sluggish global demand, and many are reluctant to increase investment amidst elevated uncertainties.

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Roiana Reid, roiana.reid@berenberg-us.com

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