Orders for U.S.-made big-ticket items were weaker-than-expected in February as the world’s richest economy hit hard by troubles in the housing sector set off the year at a slower pace, a government report on Wednesday showed.
New orders for U.S.-made durable goods rose a smaller-than-expected 2.5 percent in February and, excluding volatile transportation, orders for these costlier goods meant to last more than three years, were down for the fourth time in the last five months.
We don’t go much for the volatile month-to-month changes, after black-box seasonal adjustments, compared to estimates. Instead, we think a better gauge of the economy’s health is to look at growth trends in the data over time. Specifically, we like to compare the actual (not seasonally adjusted) data to the same figure from a year earlier. Alas, that too presents a negative picture.
Total durable goods orders and shipments have been growing at a low-single-digit year/year growth rate for the last five months, and the growth trend has clearly been declining for the last year. Meanwhile, inventories are soaring, having grown faster than either sales or orders for half a year and showing no signs yet of slowing down. The law of supply and demand dictates that excess inventory will result in lower prices and margins for manufacturers even if orders start to recover.
“Excluding volatile transportation” doesn’t change things much. The slowdown in growth simply looks a bit steeper.
There are some signs, particularly in industries at the early stages of the manufacturing chain, that the slowdown has been recognized and steps are being taken. Consider, for example, primary metals:
Orders for primary metals appear to have normalized though shipments are still slowing and the backlog is absolutely unchanged year/year. However, inventory growth is slowing as well. Once inventory growth slows below the order growth rate, the backlog can be rebuilt and the correction will have eased.
Finally, for only the third time in a year, more computers were ordered and shipped than in the prior year. Although we’d like to hope that this signals an improving outlook for technology companies, the two previous examples turned out to be head-fakes so we’d like to see the trend continue a while longer before breaking out the champagne, particularly since inventories continue to grow at a faster rate.