KEY DATA: Durables: +0.7%; Excluding Transportation: +0.8%; Non-Defense, Non-Aircraft Capital Spending: +1.4%
IN A NUTSHELL: “Corporations are investing in big-ticket items, a clear indication that business conditions are improving.”
WHAT IT MEANS: Durable goods orders, the poster-child for volatile data, showed once again that if you don’t like the numbers one month, wait thirty days and they will change. Demand for big-ticket purchases plummeted in May, setting off concerns that the economy was not picking up steam. Well, not to worry. Orders rebounded in June and the increases were in a variety of industries. Yes, aircraft, both Boeing and Pentagon, was up. But it wasn’t just sales of airliners and fighters that moved the needle. Demand for machinery, electronic products and primary metals rose. While vehicle orders fell, demand is so strong that it is likely that sector will be posting gains going forward. As for corporate capital spending, the key measure – non-defense, non-aircraft orders – jumped. They had been soft and this may be a sign of improving confidence. Looking toward the future, backlogs built in almost every major sector. That implies production should accelerate in the months to come.
MARKETS AND FED POLICY IMPLICATIONS: Just as I cautioned that we shouldn’t read too much in a decline in durable goods orders, so should be we careful not to jump to conclusions when demand rises. The data are just way too volatile to assume one or even two months of numbers mean a whole lot. With that said, the rise in orders in June means that durable goods demand has increased for four of the past five months. That is really the story. If big-ticket purchases are growing on a fairly consistent basis, then economic activity should be improving. With the labor market tightening and loan demand picking up, about the only place where there seems to be problems is housing, and that is more in new homes than existing homes. The existing market seems to have righted itself after the winter slump. Neither is strong, but it is hard to get a mortgage with income growth weak and with many homes still either under water or with limited equity, owners just don’t have the down payments. Next week the Fed is meeting on Tuesday and Wednesday, before the employment report is released. They will have second quarter GDP but regardless of the rebound from the first quarter decline, it is still all about labor compensation. The July payroll and unemployment numbers should be good, though with businesses adamant about not raising wages, don’t expect hourly earnings to pop. It will take real labor shortages before firms get the picture that to fill open slots, they will have to pay more. But as I keep saying, the longer the pressure builds, the bigger the explosion. When wages start to rise, they could really pop. The Fed has some time to watch and wait, but their flexibility may come to an end sooner than expected. As for investors, they should like this report. But it is earnings season and with orders bouncing around so much, don’t expect this report to drive the markets.