Durable Goods & GDP

by: Barry Ritholtz

The headline number miss of Thursday's Durable Goods number got some people worried about GDP Friday. Following May's 2.3% decrease, Durable Goods headline number of 1.4% for June was below the 1.6% consensus.

The real concern was not the actual miss, but the below the headline data on Business CapEx. You know, the business spending that a parade of pundits has assured everyone will rescue 2H. It was also soft, falling 0.7%, on top of May's 1.5%. The silver lining was that unfilled orders -- a sign of future demand -- rose 1.5%.


GDP consensus for Friday is 3.4%. As I noted prior, I think that is high. A 2.5 - 2.75% more accurately reflects the actual state of the economy. We have lumpy and uneven growth, as we tack to catch the wind from global growth. However, at 8:30am, we could see somewhat of a GDP pop (3 - 3.25%) if companies spent much more rebuilding their inventories over the past quarter.

Durable_goodsMy issue with that is the direct contradiction to the just-in-time mantra we have heard from so many smart people. (See this Barron's interview with Larry Haverty, Gabelli Global Multimedia Trust, on the difference between Modern versus '60s or '70s Style Recession).

Recessions have now been banished, given that companies can control their inventories so well. The Demand side of the equation no longer matters, apparently (although that begs the question as to why they would need to rebuild inventories over a quarter).

It is apparent to anyone paying attention that Housing remains a huge drag on GDP, and as we saw last month, retail sales are softening. Like Retail, whatever GDP number comes out Friday, it will be in part the beneficiary of Food and Energy inflation, which does not get properly accounted for in the GDP price deflator.

UPDATE: July 27, 2008 11:55am

Tim has an excellent breakdown of how the various components contributed to GDP: