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Pattern Of Expectation Misses Continues With Durable Goods Orders

In early March, we noted that the economy was entering a window during which we expected coincident data to begin missing consensus expectations. Since then, key data related to broad economic activity and employment have done just that. Granted, the misses have been slight to moderate in magnitude, but this is precisely how an economic inflection point of this character develops. The deterioration is gradual at first and then it accelerates. We saw another notable miss this week with the release of the advance durable goods order data for March, which declined 4.2 percent, below consensus expectations for a decrease of 1.5 percent.



This is a highly volatile series, but the month-to-month decline was the largest since 2010, so it will be important to monitor the trend for additional deterioration in April. From a big picture perspective, the long-term trend in real durable goods orders reflects the tepid nature of the economic recovery following the 2008 recession. The following graphs from economist John Williams display inflation-adjusted data during the last 12 years and he notes the weak character of the rebound from 2009.





Both durable goods orders series remain sharply below levels seen going into the 2001 recession, as well as into the 2007 recession. There has been no recovery here. If the PPI finished goods capital equipment deflator were adjusted for distortions from hedonic adjustments, the uptrend in orders seen in the last three years likely would be flat, consistent with the bottom-bouncing of other series.

Although it is too early to conclude with a useful degree of statistical certainty that an economic inflection point is developing, the recent consensus expectation misses align with the bearish scenario and it will be important to continue monitoring the trend in economic data closely. If a cyclical top is indeed developing in the stock market, we would expect the deterioration in data to accelerate during May and June.

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