- Bigger than expected decline in US durable goods orders…
- …confirms weakness of industrial activity…
- …and suggests investment in energy sector still a drag for US economy
- German inflation edges up, but should come down again soon
Decline in US core durable goods orders confirms weakness of industrial activity
US durable goods orders plunged in December, likely as a result of falling oil prices, the strong dollar and lacklustre global demand, which are putting downward pressure on the industrial sector. US durable goods orders fell 5.1% mom in December from -0.5% the previous month, far below the consensus forecast (-0.7%). This was partly the result of a fall in non-defense aircraft orders, which fell by 29.4% mom. However, core capital goods orders ex-aircraft were also weak (-4.3% down from -1.1% the previous month).
Outside transportation, the slowdown came from orders of machinery, which fell by -5.6% mom, while computers fell 2%. The only increase was in metals and electrical equipment. The three month annualised growth rate of core capital goods orders was weak (-6.9%, up from 0.6% the previous month). Although these reports are volatile, the weakness of the manufacturing sector has been there for a while and we don’t expect a rebound in the near term.
Weak shipments suggest investment will remain weak at the start of this year
Meanwhile in the shipments side of the report, non-defense capital goods shipments ex. aircrafts, which are used by the BEA to estimate investment in durable equipment in the National Accounts, saw a modest decline of 0.2%, from a previous -1.1%, suggesting a slower pace of slowdown in December. However, the three month annualized growth rate was weak (-5.8% mom down from -2.5% the previous month). Since Q2 2015, non-residential private investment in mining (includes oil and gas) has been a significant drag on US economic growth. We expect growth in investment in mining to continue to contract sharply this quarter as a result of low oil prices, which over time will trigger a downturn in production in the energy sector in the US.
German inflation rises, but should fall again soon
Turning to Europe, HICP inflation in Germany increased to 0.4% yoy in January, up from 0.2% in December. Detailed regional data show that energy price inflation increased markedly due to base effects in oil prices. Moreover, the downward impact of early discount sales of clothing and shoes in December ended in January. We expect inflation to decline again in February, when energy price inflation should fall on the back of the drop in oil prices since the start of this year. Moreover, underlying inflationary pressures remain subdued. This was also confirmed by the separately reported import prices for December. Indeed, the rise in import prices ex-energy declined from 0.5% yoy in November to 0.1% in December. This largely reflects that the upward impact of the depreciation of the trade-weighted euro in the first half of 2015 is petering out.