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  • 11-10-11, A long overdue update (Durable Goods, GDP, ISM) 0 comments
    Nov 10, 2011 12:21 PM
    The U.S. Census Bureau reported new durable goods orders decreased .8% MoM for September. This measure came in negative for three of the last four months. Still, stripping out the volatile transportation component, new orders actually increased 1.7%. On the flipside, excluding defense, new orders decreased 1.1%. It’s certainly true the economy will benefit from defense spending right now and in future months, but the reason I pointed it out is because I believe defense spending will gradually be cut back. President Obama announced U.S. troops will be out of Iraq by year-end, which signals lower need for military equipment. Further, there is political pressure to cut back spending on almost everything and the military is no exception. On the consumer side, core capital goods increased 2.4%. Unfilled orders increased .8% which suggests manufacturers have a backlog of demand to meet. Looking forward, capital expenditures have improved in recent months and suggest manufacturing will remain a strong point.
    The advance estimate of Q3 GDP came in at 2.5%. Personal Consumption Expenditures increased 2.4%, which is at odds with consumer confidence levels. The price index increased 2% (Q2 saw a 3.3% increase), which doesn’t bode well for low- and middle-income Americans. Real disposable income decreased 1.7%. I am quite worried about inflation eating away at Americans’ purchasing power and already low disposable income. Further worrisome, the personal savings rate decreased to 4.1%. Americans are drawing down their savings which is providing a temporary stimulus to the economy. This cannot last, however, because at some point their savings and ability to borrow will run out. It seems counter-intuitive to think about but our economy needs consumers to spend more in the short-term to jump start our economy but also to save more in the long-term. Nevertheless, this report quelled many economists’ fears of slipping back into recession, for now. Momentum for Q4 performance remains strong.
    The ISM October report came in at 50.8, down from 51.6 in September. The headline number is weak, mostly because of the inventory component decreasing 5.3%. However, given the decreasing inventory, looking ahead, businesses will need to ramp up orders to replace their lower stock. This is favorable for coming months and is consistent with the Durable Goods report. Prices decreased 15%, which may provide a clue to the direction of future inflation. The employment component decreased .3% but remained about the 50% threshold that signals manufacturing employment remains healthy.
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