The margin of safety for durable goods orders is wearing thin. This series isn't forecasting a recession, at least not yet, but it's now the closest to crossing the line since the U.S. slipped into macro darkness in 2008.
The Census Bureau reports that new orders for manufactured durable goods dropped 4.2% in March on a seasonally adjusted basis. That's the steepest monthly decline since the Great Recession was slicing into business activity in 2009. Business investment (new orders for non-defense capital goods ex-aircraft) fared better, dropping only 0.8% in March. But it's hard to ignore the overall trend of late, which looks increasingly bearish on a monthly basis.
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Monthly numbers for new durable goods orders are a volatile lot, of course, and so it's crucial to cut through the short-term noise in search of the bigger picture for this series, which is widely considered one of several leading indicators of future economic activity. Unfortunately, there's not much cheer to report here either: New orders for both durable goods and business investment rose a slim 2.7% and 3.9%, respectively, on a year-over-year basis. Those are the lowest annual growth rates since 2009.
It's troubling that the year-over-year percentage change for both series now appears to be stuck in a persistent deceleration phase. The growth rate didn't sink this low, or slow this quickly, in the previous two spring soft patches of 2010 and 2011. Is this a sign that the economy is destined for a deeper slowdown this time? Short of a miraculous rebound in the next update on durable goods and other indicators, it's hard to look at the latest numbers as anything other than a considerably dark warning sign.
Even worse, the downshift in new orders on an annual basis joins a similar trend in disposable personal income, which has been in deceleration mode for months. Adding to the gloom is the dramatic slump in job growth in March.
"This adds to the evidence that momentum in the economy sort of fell flat in March," Ellen Zentner, a senior economist at Nomura Securities, tells Reuters in reference to Wednesday's durable goods report.
The question is whether the fall was temporary? Judging by the rise in the Conference Board's leading index for March, there's a case for optimism. Or does the durable goods news trump that view?
We'll know the answer soon enough as new data from other corners of the economy roll in for March. Next up is today's weekly update on jobless claims. Recent numbers have looked a bit weak, as I discussed last week. Suffice to say, the crowd's not likely to be forgiving if today's update brings decisively bad news. For the moment, however, the outlook is relatively sunny. The consensus forecast anticipates that new jobless claims dropped by a healthy 13,000, according to Briefing.com.
We'll also learn today how the overall economy fared last month by way of the Chicago Fed National Activity Index. The update for February looked encouraging. A repeat performance for March would go a long way in boosting sentiment. Yesterday's durable goods news, however, suggests that we may be headed for a run of negative surprises.