New orders for durable goods tumbled in January, falling 4.0%, the U.S. Census Bureau reports. That’s the biggest monthly decline in three years and it’s sure to spark a new round of heated debate about what happens next for the economy. Nonetheless, it’s premature to use today’s numbers to argue that the economy’s destined for the skids. Indeed, the annual trend for new orders is still solidly in the black as is the year-over-year pace for business investment (non-defense capital goods ex-aircraft orders).
It’s true that the annual rate of change for both measures of new orders has been slowing, but that’s not necessarily fatal, at least not yet. It’s debatable if the decelerating pace is part of the economy’s transition from post-recession rebound to something closer to a normal expansion. It was always inevitable that the 15%-to-20% year-over-year increases posted in early 2010 were destined to fall. The question is whether the slower rate of annual growth is signaling trouble ahead? Yes, if the deceleration rolls on. For now, however, the latest numbers—new durable goods orders growing at 8% a year and business investment spending rising by 6%--are still quite strong.
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"We see no evidence of underlying slowing in the industrial economy, so we look for a rebound in February and the re-emergence of the upward trend over the next couple of months," predicts Ian Shepherdson, chief economist at High Frequency Economics.
But some analysts beg to differ. "What we are seeing is that that the buildup of inventory that made third quarter GDP so strong is beginning to crest," warns FTN Financial's chief economist, Christopher Low. "We are seeing a slowdown in domestic demand for equipment and also slower overseas demand. The three-month average and year-over-year increases are falling due primarily to weaker overseas demand."
If January's durable goods report is a harbinger of darker things to come, we might see additional evidence in the February numbers. But if we're headed for a rougher period of economic updates, it's not obvious in the early clues for this month based on the manufacturing surveys published by the regional Fed banks so far. As I noted earlier today, four reports of regional manufacturing activity reflects ongoing expansion. In addition, the Richmond Fed just released its survey and the news is upbeat here as well: "Manufacturing activity in the central Atlantic region advanced for the third straight month, according to the Richmond Fed's latest survey," the bank reports.
The next reading on February manufacturing activity arrives on Thursday, when the widely watched ISM Manufacturing Index is released. The consensus forecast sees a slight rise for this proxy of national economic activity, according to Briefing.com. Nothing less is required for thinking that the January slump in durable goods orders isn't as ominous as it appears.