Key Takeaways:
A sharp drop in headline durable goods orders masked a powerful surge in business investment, with core capital goods orders far exceeding expectations in May.
US durable goods orders fell 4.5% in May, the steepest decline in nearly a year, but a 1.6% jump in core capital goods orders signaled resilient business investment despite persistent trade uncertainty. The headline decline, the largest since June 2025, was driven entirely by a pullback in transportation equipment after April's surge, while the core reading — a proxy for business equipment spending — more than doubled the 0.6% consensus estimate.
"The core capex number is the real story here — businesses are still spending aggressively on equipment despite the noise around tariffs and growth," said Sarah Miller, senior US economist at Oxford Economics. "This suggests the investment cycle has more room to run than many feared entering the second half."
The divergence between headline and core orders highlights the uneven nature of the economic recovery. Transportation equipment, which had surged 8.5% in April on a rebound in commercial aircraft deliveries, gave back much of those gains. Excluding transportation, total orders rose 0.6%. The core capital goods category — machinery, computers, and industrial equipment — posted its strongest monthly gain since February, reversing April's 0.7% decline and signaling that corporate America is maintaining capital expenditure plans.
Other data released Thursday reinforced the picture of a resilient economy. The Commerce Department's second estimate of first-quarter GDP came in at 2.1%, well above the 1.6% consensus, while initial jobless claims fell to 215,000 from 227,000, below the 225,000 forecast. Core PCE inflation for May held at 3.4% year-over-year, in line with expectations. The S&P 500 futures rose 0.7% following the data, while the dollar index held near 101.35 as Treasury yields edged lower.
The durable goods report also showed that unfilled orders continue to accumulate while inventories remain lean. That dynamic suggests any improvement in demand could translate quickly into production gains, supporting industrial output in the second half. The last time core capital goods orders exceeded 1.5% in a single month was February, which preceded a three-month stretch of above-trend industrial production.
For the Federal Reserve, the data presents a mixed picture. Headline weakness could be cited by dovish members as evidence of slowing momentum, but the core capex strength and above-trend GDP growth argue against near-term easing. Chair Kevin Warsh has signaled the Fed is in no rush to adjust rates, and OIS markets continue to price the next move as a cut no earlier than September, with odds of a hold at the July meeting rising after Thursday's releases.
The next major test for the economic outlook comes with the June nonfarm payrolls report, due July 3, which will show whether the labor market remains as resilient as the capex data suggests. If payrolls print above the 200,000 consensus, the case for a September cut weakens further.
This article is for informational purposes only and does not constitute investment advice.
