New orders of capital goods, an important component by which economists measure business activity,  increased in January. Many economists believe that business and consumer spending on goods is the reason for the strong showing last month.   

Capital goods was up 6.5% in December according to the Department of Commerce.  New orders for durable goods overall in the month of January was up 3.4%, the ninth monthly gain in a row, and an increase that caught economists by surprise. 

Encouraged by the rise, some economists pointed to spending on machinery and equipment by businesses to replace labor shortages. Manufacturing plants are having a hard time filling jobs with people, so purchasing machines has become a remedy. Everyday consumers are also lending to the boost. There has been an increasing demand for housing to be built along with the materials needed to construct those new homes. Additionally, since the pandemic has regulated many people to their abodes, home renovations have also become a spending outlet.  

“Our economy is rotating to producing and demanding different things as people move to the suburbs,” said Mike Englund, chief economist at Action Economics. “Housing has gone through the roof, the demand for furniture and equipment to go inside the housing has gone through the roof as people are remodeling. Essentially, people are taking their restaurant dollars and they are spending it elsewhere.”

Last year, while stuck inside, Brooklyn homeowners Sekiya Dorsett, who lives with her wife Sofia Berger, were sitting at their dining room table when it dawned on them that they had a backyard that they could renovate.

 “Without a doubt, this pandemic has been a time where you were sitting in your house and you would look around and say ‘this thing?’” Dorsett said. “For homeowners, you were confronted with all of the things that you left behind because you were never home.” 

Nondefense capital goods orders increase in January 2021

The report on Thursday also showed that shipments rose 2.0% and that transportation orders increased 7.8%. Both have increased for eight consecutive months. 

Unfilled orders increased for the seventh month in row by 0.1% and inventories have declined for the second consecutive month highlighting that manufacturers are having a hard time shipping products to businesses and therefore businesses are finding it difficult to stock their shelves. The decline in inventory, coupled with seven consecutive months of growth, is not a negative harbinger. In this particular context, with sustained growth in new orders and a decrease in unfilled orders and inventories, economists say that this can be seen as a positive in the long run because there will be future activity.  

“We’ve not only recovered what we’ve lost in the pandemic shutdown last spring, but those orders are growing at a rapid pace from record highs,” said Christopher Low, chief economist at FHN Financial.  “When that happens and inventories fall two months in a row, it’s a pretty clear indication that the inventory decline is involuntary, that companies are still having trouble sourcing goods, which – long term – is a positive thing because it means that we will see investments in logistics and shipping.” 

Economists have pointed to government monetary aid as a result of steady consumer spending and with President Biden’s pending $1.9 trillion relief slated for consumers and businesses, further spending could continue.