Durable Goods Orders Increase of 1.9% Is Encouraging for Challenged Economy

by: James Picerno

Score another point in favor of the soft patch theory vs. expecting a new recession around the next corner. New orders for durable goods (pdf) rose by a seasonally 1.9% in May, reversing the previous month’s sharp 2.7% loss. If we strip out some of the volatile sectors of the report, there’s still a pop in last month’s tally. For example, ignoring transportation equipment leaves durable goods orders up by 0.6%; excluding defense translates into a 1.9% gain for the rest of new orders for durable goods.

There was also a tidy 1.6% gain for business investment, based on the proxy of non-defense capital goods ex-aircraft orders. This slice of the numbers "generate attention because they are a leading indicator for capital spending," notes economist Evelina Tainer in "Using Economic Indicators to Improve Investment Analysis."

All in all, a decent report, and just in the nick of time, given the current worries about the economy. It’s only one indicator, of course, but as a closely watched leading indicator it’s encouraging that the latest number is higher vs. the previous month. More importantly, the trend for new orders continues to look solid. The annual pace for durable goods is ahead by 9%. That’s quite good, as the chart below (click to enlarge) suggests. The annual rate is likely to drift lower in the months ahead, as the post-recession period matures. But for the moment it’s hard to make a case that a recession is imminent based on the year-over-year change in new orders. That's no silver bullet, but it's one more stat in favor of the growth camp.

"We’re starting to see a little bit of bounce back from the supply chain disruptions we saw last month,” Michael Brown, an economist at Wells Fargo Securities, tells Bloomberg. "We’re going to continue to see strong gains from capital goods and business fixed investment."

There’s always a danger of leaning too heavily on one indicator, or even a handful of indicators, to evaluate the broad economy and so durable goods should be reviewed with some macro humility. The good news is that an expansive measure of May’s economic reports, most of which are in, suggests that last month represents a revival of growth vs. April’s modest retreat. More about that next week.

But let's not forget the critical challenge at this juncture. Business investment still looks vibrant and demand for durable goods is chugging along nicely, but there’s quite a bit of uncertainty about the next phase for the labor market. Today’s durable goods report provides a bit of support for remaining optimistic, but the sting from yesterday’s initial jobless claims report lingers.

There are several key economic reports scheduled for release next week, but the main concern is still the uncertainty surrounding May’s sharp slowdown in job creation. Was it a one-time event? Or is the labor market headed for a sustained period of renewed weakness? Until we find some clarity on these questions, we're in something of a state of limbo. Changing the crowd's perspective, for good or ill, is going to have to wait until the June employment report, set to hit the street on July 8. Today’s update durable goods orders, at least, offers a fresh data point for thinking positively.