By Rom Badilla, CFA
The Commerce Department released a report showing that orders for Durable Goods reversed course from the prior month surprising market participants. Durable Goods Orders, which provide the market an indication of future manufacturing activity, spiked 9.9 percent in September versus forecasts of 7.5 percent. In addition, there was a slight upward revision in the prior month by a tenth of a percent to -13.1 percent. Durable Goods Orders excluding Transportation, which is a less volatile reading, improved by 2.0 percent after a decline of 2.1 percent in August. Economists were expecting less of an increase in September as consensus survey was at 0.9 percent.
Despite the increase, the details behind the headline number signal concerns over the outlook for economic growth. Shipments of Nondefense Capital Goods excluding Aircraft (aka Core) continue to show signs of a declining trend as September data fell by 0.3 percent after a decline of 1.2 percent in the prior period.
Furthermore, Orders which is a gauge of demand looks bleak as well. Orders on Core Capital Goods were flat in September, following a downward revision of the previous month by nine tenths of a percent to 0.2%. This data series is significant since it is the component that goes into estimating equipment and software investment within GDP calculations and growth for the U.S. economy. Today’s weakness in orders suggests that this is slowing which isn’t good news for economic growth.
The chart below shows the level of both Shipments and Orders for Core Capital Goods along with the last two U.S. recessions.
Today’s flat showing which may play into a slowing economy, suggests that the upcoming elections and policy uncertainty is taking its toll on business decisions according to Deutsch Bank’s Economist, Joseph LaVorga. In their latest U.S. Macro Flash, he wrote the following:
The September durable goods report confirmed corporate indecision-making. The headline rose +9.9% but this was due almost entirely to aircraft orders which rose over 500% in the month. Core durable goods orders, defined as nondefense capital goods orders excluding aircraft, were unchanged in September compared to a near similar result in August (+0.2%). The lack of order flow the last couple of months likely reflects the uncertainty of the upcoming election and how the “fiscal cliff” will be dealt with.
With softening on the Investment side of GDP, coupled with continuing declines in Government Expenditures as politicians grapple with the impending Fiscal Cliff, further growth for the U.S. economy will have to come from the consumer side of the equation (that is unless the U.S. suddenly shifts gear and becomes more of an export driven economy which cannot happen in the short-term).
The recent positive developments in consumer spending with an improving housing market could provide some offset to the aforementioned weakening components of economic growth. It remains to be seen if those drivers are sustainable since the impending Fiscal Cliff and the subsequent higher tax burden may suppress any desire to up spending by the consumer. The fact is that there are enough concerns among the many drivers of the economy to conclude that growth will remain tepid for now. This should keep a cap on bond yields from rising. Idle resources in a muddle through economy should coincide with low inflation pressures and hence low interest rates.
According to Trade Monster’s Bond Trading Center, U.S. Treasuries rallied slightly with interest rates falling. The yield on the current 10-Year U.S. Treasury was down 2 basis points to 1.80% on Thursday.
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