Shipments of core capital goods rebounded in March, adding to the reasons why the data for gross domestic product should show an upside surprise when it is released on Thursday.
The core capital goods shipments data, which excludes defense and aircraft, feeds into the calculation of GDP is a proxy for the non-residential component of GDP.
March’s number rose by 0.2% on a monthly basis, bringing the three-month moving average annualized pace to 2.0%, a robust increase compared to the fourth quarter, when it was unchanged.
But some of that increase that is measured in dollar terms should be discounted because of the elevated inflation this year. Still, the non-residential investment component should remain in a healthy positive territory.
Given the data, we are more comfortable with our call for a 3% increase in overall GDP for the first quarter, which is markedly higher than the market consensus of 2.5%.
The future, however, looks less rosy. Orders for core capital goods dropped by 0.1% on a three-month moving annualized basis—the third decline in a row—despite a 0.2% monthly increase in March.
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Businesses seem less incentivized to invest now that rate cuts will most likely be delayed and lessened this year amid sticky inflation and robust growth. The data is set up for a weaker second quarter for the sector.
While the Federal Reserve will take all of this information into account later this year when it considers rate cuts, its reliance on backward-looking data for now might prevent the central bank from being more aggressive than is warranted.
With data for the entire second quarter not available until July or even August, a June rate cut appears less likely.
