Are There Dark Days Ahead for the Economy?

by: James Picerno

In search of economic signs confirming or denying the gathering weakness, Wednesday morning's durable goods report for August extended fresh support for the fear that the forces of darkness are indeed approaching. As our chart below shows, August witnessed the biggest monthly drop in percentage terms since January. It also was the first decline since May. If you ignore defense orders, new orders dropped by an even steeper 5.9% last month.

It's hard to put a positive spin on the latest durable goods report. The aura is that much gloomier when you couple Wednesday's news with Tuesday's update on existing home sales, which tumbled more than 4% last month to the slowest annualized rate in five years.

It would be folly to dismiss the signs that the economy's weakening. On the other hand, all's not lost, at least not yet. Consider our second chart below, which puts Wednesday's weak durable goods report into broader historical context. As you can see, the latest dip, while troubling, is hardly definitive proof that recession is imminent. We're still within the range of volatility that's prevailed in recent years.

But let's be clear: the pressures are building, and from the evidence in recent weeks it's only prudent to expect that the news will get worse before it gets better. That, at least, is our guess. But the economy is still standing, and as far as we can tell, despite all of the hits, at this point it still continues to hold up. If there's a deciding factor that will tip the balance one way or the other, that will probably be consumer spending, which accounts for more than 70% of GDP.

The next update on Joe Sixpack's spending habits comes on Friday, when the government releases personal income and spending numbers for August. The consensus outlook calls for a 0.4% rise in spending, according to That would match July's 0.4% rise, suggesting that stability still dominates.

Yet even a 0.4% rise in spending would not dispel the notion that Joe's affinity for buying is weakening. The year-over-year trend has clearly been down in 2007. Consumer spending, while still rising, has been advancing on a 12-month basis by less than 5% recently, down from the 5-6% rate in 2006, and nearly 7% at times in 2005.

Momentum, down or up, isn't easily reversed when it comes to macro trends. That said, the anticipated slowdown is now widely anticipated. A change of course that brings a surprise burst of growth would likely trigger a large relief rally in equities.

Ultimately, the data will tell the story, and by that standard the optimists are now in need of some statistical assistance, and soon. The hour is late. Hope that growth can win one more time is still alive, but it's fading.