Monday, September 27, 2010

Solid Growth In Durable Goods Orders Is A Positive Sign For The Economy

Business capital spending remains a bright spot for the economy with new durable goods orders about 11 percent higher than a year ago. Strong durable goods growth is a positive indicator for economic growth since it suggests that companies are spending money. See the following post from The Capital Spectator.

New orders for durable goods fell 1.3% in August, the Census Bureau reported this morning. The drop more than reverses July’s 0.7% rise, which was the first since April. But the news isn’t quite as bad as the headline number suggests. Most of the decrease was due to a steep fall in orders from the volatile transportation sector. Excluding this group shows that new orders actually rose 2%. Meanwhile, new orders for capital equipment excluding aircraft jumped 4.1%, rebounding from the 5.3% drop in July. Corporate investment, in sum, rebounded last month.

Durable goods orders generally are a key sign of the business sector’s sentiment on the future for the economy and so we should pay close attention to the trend for this data series. Unfortunately, the month-to-month volatility in the series is often high, which complicates the analysis. That inspires looking at the longer-term trend. The 12-month rolling percentage change is a good place to start. On that score, new orders for durable goods have been rising sharply on a year-over-year basis, as the chart below shows. Even after August’s dip, new orders are higher by 11% vs. the year-ago figure. Of course, the percentage change looks impressive because the actual dollar level of new orders at this time last year was still depressed because of the recession, and so we shouldn't read too much into the recent pace.

In other words, the strong 12-month change in new orders of late was all but certain to trend lower after peaking at around 19% as of this past April, the highest in a decade. As year-over-year comparisons return to something closer to normal, so too will the annual trend.

The question, of course, is how much downshifting is coming? For some perspective, let's turn to the actual amount of money committed to new orders. As it stands now, the seasonally adjusted dollar value of new durable goods orders also peaked in April. As the second chart below shows, this measure of new orders have been more or less flat to slightly declining since the spring.

Expecting more of the same is probably a safe bet. Growth is likely to be sluggish, evaporating entirely at times. But a sharp decline from here on out looks unlikely. Short of a new shock to the economy of some magnitude, the economic recovery is likely to proceed, albeit slowly, tentatively and at times backtracking. As troubling as that outlook is, it’s not sufficient to expect big declines, if any, in the broad economic trend when over 90% of the labor market is still employed and interest rates are at or near historic nominal lows.

Is that enough to launch a new boom? Probably not, at least not any time soon, given the current climate of high debt on household balance sheets. But it’s probably enough to stave off a new recession.

"The double-dip seems to be off the table," Eric Mintz of Eagle Asset Management tells Bloomberg. "The durable goods report was strong, it supports the idea that companies are spending money which is important for overall economic growth, so it’s another bullish indicator."

"Though downshifting a tad, business capital spending remains one of the few consistent bright spots on the economic landscape," Sal Guatieri, senior economist at BMO Capital Markets, says via AP.

The problem is that there are offsetting factors to consider as well, starting with the weak growth in the labor market on a net basis. For the moment, it still all adds up to the new normal. What does that mean? Progress is going to come slowly in the months and quarters ahead. It'll be strong enough to fend off a new recession, but it's unclear how much more you can squeeze out of this stone.

This article has been republished from James Picerno's blog, The Capital Spectator.

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