KEY DATA: Orders: +0.7%; Excluding Transportation: -0.2%; Capital Spending: +0.2%/ Pending Sales: -0.8%; Claims: +14,000
IN A NUTSHELL: “The soft demand for big-ticket items doesn’t provide hope that the first quarter sluggishness will turnaround soon.”
WHAT IT MEANS: The administration wants to create 3% growth for as far as the eye can see. Well, it has a way to go to get there. Durable goods orders rose in March, which should be a good sign. However, much of the gain came from a surge in defense aircraft orders and a more moderate increase in nondefense airplane demand. Meanwhile, orders for vehicles, computers, communications equipment, fabricated metals and machinery were off. There was strength in the electrical equipment and appliances segment, as well as primary metals, but that was it. As for capital goods spending, it rose only minimally. CEOs may be optimistic, but they have yet to put their money where their mouths are. Looking outward, order books did fill a bit, so there could be some additional production going forward.
The housing market has been doing its part in keeping the economy going and that should continue. Yes, the National Association of Realtors reported that pending home sales eased in March, as three of the four regions reported that contract signings for existing homes declined. They were up only in the South. However, the level is still quite high, so look for home sales to be strong, even if the growth in demand isn’t great.
New claims for unemployment insurance rose solidly last week. This number has been noisy lately, so don’t take too much away from the increase. The level is still low, indicating that the labor market continues to tighten.
MARKETS AND FED POLICY IMPLICATIONS: It looks like tomorrow’s GDP report could be very disappointing. After today’s durable goods orders numbers, the Atlanta Fed thinks growth could come in essentially flat. The surging household and business optimism has not translated into growing economic activity. People are optimistic, but are taking the Jerry Maguire approach: Show me the money! The greatest tax cut in the history of the solar system may have been proposed yesterday, but its passage is well into the future. Indeed, it is hard to know what will come of the proposal as the one-pager was purposely vague so it couldn’t be scored. At least that is what the White House budget chief indicated. That said, it can and is being scored, if only to provide a baseline from which legislators can work as they try to actually reform the corporate tax system. The numbers have started rolling in and they are pretty discouraging. The estimates of the hit to the national debt ranges from $3 trillion to $7 trillion over a decade. That means there will have to be massive loophole closings or the tax cuts will balloon the debt. The administration hasn’t shown any great willingness to detail those changes to the corporate goody-bag, leaving the heavy lifting to Congress. Unless Republicans suddenly have an epiphany and decide that deficits are wonderful, it is likely the final plan will look nothing like the one-pager the President and his men proposed. And that is good reason for businesses and households to not act until they determine if they are suffering from rational or irrational exuberance.