Tuesday, February 28, 2012

Durable goods sound the first loud sour note

It is a much weaker-than-expected durable goods report. 

New orders fell by 4% after rising by 3.2% and 4.2%. So the impact on the growth rate for orders is not going to be severe. The lesson may be that the economy is not yet building that real head of steam more than it is...oh, no the bottom is falling out. Don't be Chicken Little looking down. 

Indeed, except for the folk at ECRI who still have their recession call in place few will want to extrapolate this one observation. The fact is that the regional PMIs in force this month are still upbeat. MFG surveys (PMI and diffusion indicators for February, not just January) are still very upbeat. 

All four of the regional Fed releases (now available) are stronger in Feb than they were in January - the durable goods data draws form January. But the outlook portion of those surveys is lower in than in Jan for three of four of those reports. Even so the outlook readings are still relatively strong and certainly solid.

At the end of the day the durable goods report is volatile and it is keeping its 'good name' in the clear on that score this month. 

Three month growth rates for shipments, orders, unfilled orders, and for inventories are still accelerating - not just growing- over three months compared to six months. For ex-transportation the picture shifts- there the growth rates are all (almost all) positive but all are decelerating and the outright three-month orders growth rate is now negative. Excluding defense all growth rates for those categories are positive and are accelerating. For nondefense capital goods all growth rates are positive and accelerating except for shipments which are declining over three months and decelerating compared to six months.

These are hardly disaster statistics.

Overall sequential growth rates mostly show acceleration over the past year. Ex transportation most growth rates show continuing deceleration over the past year - but only for orders is the three-month pace negative as we mentioned above. 

Trends are lower for machinery with several of the sequential order growth rates negative (sequential rates: 12-mo, 6mo, 3-mo). Trends for computers are lower and negative across several of the key categories. Trends for communications equipment are mixed with a number of negative readings. Trends for transportation and vehicles are mostly positive and steady.

Sales are still growing faster than inventories in 57% of the industry categories over three months. So inventories are NOT building up, Inventory to sale ratios are not climbing.  Also over three-months: Shipments growth is positive in 71% of the categories, New orders growth is positive in 57% of the categories, unfilled order growth is positive in 85% of the categories and inventory growth is positive in 71% of the categories. Categories ( Primary metals, Fabricated metals, Machinery, Computers and electronics,  Electrical equipment, Transportation equipment, all other durable goods) 

Because durable goods is so volatile we will want to see what happens next month. Is this month a re-calibration of data that had been too strong over the past two months or is there some encroaching weakness?

Finding three month net declines in Machinery orders and in electrical equipment orders, key US export categories, is something that makes me wonder if we are seeing some effect for slower growth abroad. 



In order to confirm a real economy we must see many signs of economic recovery.


Theirs always a sour note somewhere.