Durable Goods Collapse Calls for Slowing Economy
By Rom Badilla, CFA
September 28, 2012
The Commerce Department released a report showing that orders for Durable Goods plunged in August raising concern that the economy is decelerating. Durable Goods Orders which provide the market an indication of future manufacturing activity, fell by 13.2 percent in August versus forecasts of -5.0 percent. In addition, there was a downward revision in the prior month from a gain of 4.2 percent to a 3.3 percent. Durable Goods Orders excluding transportation, which is a less volatile reading, dropped by 1.6 percent after a decline of 1.3 percent in July. Economists were expecting an increase in August as consensus was at 0.2 percent.
The details behind the headline number do not improve the outlook. Shipments of Nondefense Capital Goods excluding Aircraft (aka Core) continue to show signs of flat-lining as August data fell by 0.9 percent after a decline of 1.1 percent in the prior period.
While orders for these goods which is a gauge of what to expect in the future, increased in August by 1.1%, the downward revision in the previous month provided a bigger offset. Orders on Nondefense Capital Goods excluding Aircraft came in at -1.1% in July after an initial report of no change. This data series is significant since it is the component that goes into estimating equipment and software investment within GDP calculations and growth for the U.S. economy. Today’s weakness in unfilled orders suggests that this is slowing which isn’t good news for economic growth.
The chart below shows the level of both Shipments and Orders for Core Capital Goods along with the last two U.S. recessions.
Today’s dismal data which may play into a slowing economy, suggest that policy uncertainty as well as actual growth hurdles may be playing a role according to Citigroup’s economist, Steven C. Wieting. In their latest U.S. Macro Flash, he wrote the following:
Today’s durable orders report should garner more attention than usual given policy uncertainties. Aside from maintenance purchases, business expansion plans can be slowed down until uncertainties like tax policy announcements are hurdled.
In general, we see little evidence that consumers have altered their savings behavior because of a looming fiscal cliff. Business investment has not underperformed in the first half and firm dividend payout decisions all point to an expectation that policy shocks like the fiscal cliff will be avoided. It is difficult to discern how much a capex slowdown should be generated by the slowing recovery in general. However, today’s data should add to evidence that uncertainty alone is restraining activity.
With softening on the Business Investment side of GDP, coupled with continuing declines in Government Expenditures as politicians grapple with the impending Fiscal Cliff, further growth for the U.S. economy will have to come from the consumer side of the equation (that is unless the U.S. suddenly shifts gear and becomes more of an export driven economy which cannot happen in the short-term).
Improving consumer sentiment coupled with an improving housing market could provide some offset to the aforementioned weakening components of economic growth. Whether that holds true or not, remains to be seen. The fact is that there are enough concerns among the many drivers of the economy to conclude that growth will remain tepid for now. This should keep a cap on bond yields from rising. Idle resources in a muddle through economy should coincide with low inflation pressures and hence low interest rates.
According to Trade Monster’s Bond Trading Center, U.S. Treasuries are selling off slightly with interest rates rising. The yield on the current 10-Year U.S. Treasury is up 4 basis points to 1.65%.
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