Category Archives: Durable Goods Orders

Durable Goods Orders, Economic Indicators, Home Prices, Supply Managers’ Non-Manufacturing Index

January Supply Managers’ Non-Manufacturing Survey, November Durable Goods Orders and Home Prices

INDICATOR: January Supply Managers’ Non-Manufacturing Survey, November Durable Goods Orders and Home Prices

KEY DATA: ISM (Non-Manufacturing): -3.1 points/Employment: -0.7 point/Orders: -0.7%; Capital Spending: 0%/Home Prices (monthly): +0.1%; Over-the-Year: +5.5%

IN A NUTSHELL:   “The economy hardly ended the year with a bang, but only because the recent pace was not sustainable.”

WHAT IT MEANS:  It would be great if we could get a string of five percent growth rates, but the likelihood that the third quarter pace will be duplicated anytime soon is not great.  What would be good is if the economy eases only modestly and that looks to be the case.  The Institute for Supply Management’s December index of non-manufacturing activity fell solidly, but there is no reason to worry.  Yes, just about every component posted decent declines, but the levels also matter and they are still pointing to decent growth.  That is, the services sector is coming down from extremely high levels to more sustainable and solid levels.  Indeed, hiring continues to be strong and dropped the least of all components.  The one change that does cause a little concern is the sudden shrinkage in order books.  The thinning was modest, though.

As second indication that the summer’s breakneck pace is cooling was the drop in durable goods orders in November.  Interestingly, while these data are usually really volatile, there was no sector, except defense aircraft, that posted either a large change.  As for business spending, executives continue to be cautious, as capital goods orders were flat after having dropped the previous two months.  I guess a strong economy is not enough to get firms to invest in the future.

Housing prices look like they have finally stabilized.  The year-over-year increase had been slowing for quite some time but we the latest data are indicating the drop is largely over.  CoreLogic’s November index showed a rise in both the monthly change and the yearly increase.  Every state and 96 of the top 100 metro areas posted increases since November 2013.

MARKETS AND FED POLICY IMPLICATIONS: The quarterly GDP growth rates always bounce around even when conditions are great.  The summer’s 5% pace was way above expectations but we really are not sure what trend growth will look like.  I think we can expand at or above 3.5% this year.  Consensus is around 3%.  As long as energy prices don’t spike, consumers will have lots more income to spend and the likely gains in wages will only add to purchasing power.  Ultimately, businesses will recognize that the U.S. economy has turned the economy and investment will rise with that epiphany.  Think about it.  The Conference Board’s CEO Confidence Index declined in the third quarter even as the economy was soaring.  So who knows what drives thinking in the corner office?  Maybe executives are more worried about the rest of the world, which is clearly a concern.  But the U.S. is hardly a problem.  Regardless, we get the December employment numbers this Friday and that is what will likely drive investor and Fed thinking.  Don’t expect another job gain number anywhere near 300,000, but it should be decent and the unemployment rate could decline even if the participation rate rises.

Durable Goods Orders, Economic Indicators, Gross Domestic Product, Income and Spending, New Home Sales

Revised Third Quarter GDP, November Spending, Income, Durable Goods Orders and New Home Sales

KEY DATA: GDP: 5.0% (revised up from 3.9%)/Consumption: +0.6%; Disposable Income; +0.3%/Durable Orders: -0.7%; Private Investment: 0.0%/New Home Sales: -1.6%

IN A NUTSHELL:   “The economy boomed in the summer and while growth may have moderated during the fall, it is still moving forward solidly.”

WHAT IT MEANS:  Lots of numbers today.  Third quarter GDP growth was revised upward to its strongest rate in eleven years.  The revision was powered by a realization that consumers spent a lot more than initially thought.   There was also better business investment activity.  It is nice that both households and businesses spent aggressively during the summer, but will that be sustained?  Maybe not at 5%, but we could easily get another number at or above 3.5%.  Consumer spending surged in November after a solid gain in October.  So much for a weak Black Friday.  The gains were across the board, when you adjust for price changes.  So far this quarter, real consumption is rising at a 3.7% annualized pace and that could come in even higher.  First, people have the money to spend.  Income, adjusted for inflation and taxes, surged in November and wage and salary gains were solid.  People are spending but the savings rate is fairly stable, a sign that households are not getting ahead of themselves.  Second, confidence is rising.  The Thompson Reuters/University of Michigan Consumer Sentiment Index rose sharply in December to its highest level in nearly eight years.  Happy people make for happy shoppers.

The manufacturing sector has helped lead the way but there are questions about how strong it will be going forward.  Durable goods orders fell sharply in November and that was with a pick up in civilian aircraft demand.  The report was mixed.  There was weakness in primary and fabricated metals, computers and defense aircraft.  On the other hand, orders for computers, communications equipment and vehicles were up.  Business capital investment was flat.

Housing has been moderating for a while and that trend seems to be continuing.  New home sales fell, surprisingly, in November.  Prices are rising, but not by much.  Indeed, the 1.4% increase over the year is much less than we are seeing in the existing market.  The Federal Housing Finance Agency’s October increase came in at 5% since October 2013.

MARKETS AND FED POLICY IMPLICATIONS: Patience is a virtue but it could also be an albatross around Janet Yellen’s neck.  (I never worry about mixed metaphors.)  The key to Fed policy is economic and wage growth and boy is it clear the economy has shifted gears.  The consensus for fourth quarter growth has been about 2.5%.  With the large upward revisions to third quarter growth, I am now closer to 3.5%, down from 4%, and the spending numbers support that estimate. While housing may not add much, the real uncertainty is consumers emptying shelves and causing inventories to drop.  That would moderate fourth quarter growth but when warehouses are restocked in the first quarter, activity would accelerate.  Regardless, the economy is in very good shape, probably better than the FOMC realized when it met and when Janet Yellen said she would be patient.  The Fed may want to be patient and err on the side of too much inflation, but the strong job gains are likely to continue and lead to solid wages increases fairly soon.  The FOMC may have to move earlier than most now expect.  Investors should love today’s numbers but once they stop drinking the spiked eggnog, they may realize that strong growth pushes forward the time when the Fed removes the syringe from the markets.  But for now, it is time to celebrate.

Have a Happy and Healthy Holiday!

Consumer Spending and Income, Durable Goods Orders, Economic Indicators, Weekly Jobless Claims

October Consumption, Income, Durable Goods Orders and Weekly Jobless Claims

KEY DATA: Consumption: +0.2%; Real Disposable Income: +0.1%/Orders: +0.4%; Business Investment: -1.3%/Jobless Claims: 313,000 (up 21,000)

IN A NUTSHELL:   “On a day where there are a rafter of data, only some of them are turkeys.”

WHAT IT MEANS:  The long weekend has created a backlog of numbers and they are all coming out this morning.  The first group were somewhat mixed.  Consumer spending continued to improve in October, which is very good news.  Indeed, it rose despite a reduction in durable goods demand.  That was a little odd as total vehicle sales edged upward.  A solid holiday shopping season could push consumer demand up to 3% for the fourth quarter, which is where I have it.  As for income growth, that was not as strong as we would like, but conditions are clearly changing.  While gains are not spectacular, total wages and salaries have increased by 4.4% over the year.  Yes, some of that is due to more jobs, but about half is due to actual wage increases.  Still, adjusted for inflation, average wage increases continue to lag.

On the manufacturing front, durable goods orders rose in October.  That was a bit of a surprise, but the details are what matter.  There was a 45% increase in defense aircraft orders and that is not likely to be repeated given the spending restraints in place.  Excluding defense, orders were down sharply.  In addition, the best measure of business investment, nondefense, nonaircraft capital goods orders, posted a second consecutive 1.5% drop.  That is not a sign of aggressive business investment activity.  Order books are filling, so that should lead to more production.

Finally, there was the very strange large surge in weekly jobless claims.   The individual state data don’t seem to jive with the overall change so it is hard to really know why that happened.  Also, Thanksgiving is late this year so maybe there was an issue with the seasonal factors.  In any event, this number should be viewed with caution.  We need to see what happens over the next few weeks to determine if the labor market tightening process is moderating.  Keep in mind; the level is still consistent with solid, though not robust, job gains.

MARKETS AND FED POLICY IMPLICATIONS: It is unclear what to make of today’s numbers.  Nothing was overly strong and there were some weak reports as well.  So the best that can be said is that confusion about the strength of fourth quarter growth remains high.  The estimates range from the low 1% to over 4%, which shows that economists are clueless right now about what is happening.  I still think we could approach 4%, but we need a really good holiday shopping season.  So, go out and spend like crazy this next week.

Have a Happy Thanksgiving!

Consumer Sentiment, Durable Goods Orders, Economic Indicators, Home Prices

October Consumer Confidence, September Durable Goods Orders and August Home Prices

KEY DATA: Confidence: up 5.5 points/Orders: -1.3%; Excluding Transportation: -0.2%/Home Prices (Monthly): -0.1%; Year-over-Year: +5.6%

IN A NUTSHELL:  “The highest confidence level in seven years shows that it’s the economy that really matters and for many, it looks like it is getting better.”

WHAT IT MEANS: Ebola may be all people are talking about but it doesn’t seem to be getting a lot of us down.  The Conference Board’s Consumer Confidence Index jumped in October to its highest level since October 2007.  While the current conditions index moved up at a modest pace, expectations surged.  Fears of a job slowdown are fading rapidly and that is triggering a belief that incomes and business activity will be on the rise. 

The manufacturing sector has become a bit of a question mark.  For the second consecutive month, demand for durable goods fell.  Excluding transportation, it was the second decline in three months.  Still, the fall off has not been that sharp, so I am not yet worried about it.  As for the details, the biggest drop was in civilian aircraft.  Orders are still up by about 40% compared to last year.  There was also a huge reduction in communications equipment orders but more moderate declines in computers and machinery.  Vehicle demand was essentially flat.  Despite the sluggishness in orders, backlogs are growing and that creates expectations that production will have to be ramped up.

The steady deceleration in home price increases continued in August.  The S&P/Case-Shiller 20-city index declined as twelve of the twenty metropolitan areas were down.  Over the year, the increase slowed to 5.6% from 6.7% in July.  Prices are back to where they were in spring, 2005.

MARKETS AND FED POLICY IMPLICATIONS: The surge in confidence was the real eye opener in today’s reports.  It’s not as if the world is spinning along merrily.  It actually seems to be spinning out of control.  But that is not affecting the outlook for the future, especially when it comes to jobs and incomes.  And that is critical, since people tend to make spending decisions based on their financial situation, not because world events or vague threats of a disease outbreak.  The sharp decline in gasoline prices, undoubtedly, is helping, but since most of the gain came from expectations, not current conditions, it is likely that gasoline is just one factor in consumer thinking.   With outlooks brightening and more money being left in the wallet after filling up the tank, there are real hopes that this holiday shopping season could be very good.  I suspect that investors will grab onto that possibility.  As for the Fed, the FOMC is meeting and will issue a statement tomorrow.  Let’s wait and see what they say but I don’t think there is a consensus yet for changing much in the statement. 

Consumer Sentiment, Durable Goods Orders, Economic Indicators, Home Prices

August Consumer Confidence, July Durable Goods Orders and June Home Prices

KEY DATA: Confidence: +2.1 points: Current Conditions: +6.7 points; Expectations: -1 point/ Orders: +22.6%; Excluding Aircraft: +1.6%/ Home Prices (Monthly): 1%; Year-over-Year: 8.1%

IN A NUTSHELL:  “Consumers are getting some real smiles on their faces and that should help propel spending, but only if wage increases improve.”

WHAT IT MEANS: There were a number of key reports released today and maybe the most interesting one was the Conference Board’s Consumer Confidence numbers.  Overall confidence rose solidly again in August, the fourth consecutive increase.  The level hasn’t been this high since October 2007.  The eye-opening component was the Present Situation index, which surged.  There was a sharp rise in the percentage of respondents who thought that jobs were plentiful and a modest decline in those who felt it was difficult to find a position.  Strangely, fewer believe job openings will rise in the near future.  Rationality may not be at work here.  The other key finding is that people are not overly optimistic about their incomes increasing going forward.  That, even more than their general view of the world, could keep households from spending briskly.

Orders for big-ticket items skyrocketed in July, but when civilian aircraft orders rise 318%, you know that the headline is largely meaningless.  Excluding private and defense aircraft, orders did jump and that was due to strength in the vehicle sector, which was up over 10%.  Otherwise, the numbers were largely off, with only communications posting a nice gain.  Business capital spending eased, but quite modestly compared to the jump posted in June.  Backlogs are building nicely and that should mean expanding production going forward.

Home prices continue to rise, but the rate of increase is decelerating.  The S&P/Case Shiller 20-city index was up decently in June and has moved back to fall, but the gain over the year was down in all twenty cities.  The price index is back to where it was in fall 2004.

MARKETS AND FED POLICY IMPLICATIONS: Consumers are feeling a lot better about economic conditions, but they are not exuberant about their income possibilities.  That is holding back spending and until the labor market tightens further, wage increases will remain limited.  That is why the debate over the slack in the workforce is so important.  In addition, home price gains are slowing.  While that may help affordability, it hurts the churn in the market as fewer homeowners will see their equity levels rise to where they can once again sell their homes.  That said, the jump in orders does point to continued decent overall economic growth but until we get the consumer going, strong growth will remain a wish not a reality.  Investors should understand that, even as they bid up prices.  But these reports only add to the divisions that exist at the Fed.  It’s still the labor market and we don’t get the August employment report until the Friday after Labor Day.

Durable Goods Orders, Economic Indicators

June Durable Goods Orders

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.