Very Weak Durable Goods Orders
January 27th, 2015 9:38 amVia Stephen Stanley at Amherst Pierpont Securities:
This release is extremely weak. Virtually every key metric is disappointing for December and revised down for November. Business investment spending showed a brief spurt in Q2 and Q3, getting many economists excited that the long-awaited revival in business spending had finally arrived. As you know, I have been skeptical on this front, and today’s numbers are stunningly soft, which should pour a hefty pitcher of cold water on those optimistic sentiments regarding business investment in 2015. This does not mean that the economy cannot perform well in 2015, as consumption is still in a position to lead the way, and housing seems poised to strengthen at least somewhat as well. In fact, a scenario where consumer spending and housing do substantially better and business investment continues to languish is exactly the one that I had drawn up for 2015.
Back to today’s numbers. The headline durable goods orders figure sank by 3.4%, driven down mostly by a sharp drop in the volatile aircraft sector. Excluding defense and aircraft, bookings were basically flat (+0.1%) but were still modestly softer than anticipated. Excluding transportation, orders slipped by 0.8%, about 1½ percentage points worse than I had projected. The kicker to the weak December is that the November figures were also revised noticeably lower. The headline gauge in November was revised downward by 1.2 percentage points to -2.1%, though again much of the revision came from the volatile aircraft category. Excluding defense and aircraft, the downward adjustment to November was only 0.3 percentage points. So, it would not be entirely unfair to argue that outside of the aircraft sector, the numbers are only modestly weaker. That is not untrue, but the context is still not good, as the “core” orders (ex defense and aircraft) figures have been down in 3 of the past 5 months (and the up months were +0.1% and +0.2%) and are down 2.6% cumulatively since July.
I find the capital goods figures to be equally disappointing. The December tally for capital goods orders ex defense and aircraft was -0.6%, marking a fourth consecutive monthly decline. This gauge is down 4.0% since August and for the 12 months of 2014 posted a rise of only 1.4%. Similarly, the core capital goods shipments figure declined by 0.2% in December along with a 0.4 percentage point downward revision to the November result. The core capital goods shipments figures have also posted three consecutive monthly falls. I had a flat number penciled in for real business spending on equipment in my Q4 GDP forecast. I am not eager to mark my estimate down since out of 81 estimates on Bloomberg, I am 3rd from the bottom at 2.4%. Nonetheless, the monthly shipments numbers point to an outright decline in this category in Q4. Perhaps more importantly, the orders data do not offer much hope of a solid performance in Q1 either. As you know, I have believed for several years now that the policy environment, between major marginal tax rate hikes on investment income, a regulatory atmosphere that has been growth-unfriendly and at times downright hostile to business, and lingering uncertainty over the outlook (will we or won’t we get corporate tax reform, where is the next regulatory shoe going to drop, etc.), has kept corporate managers nervous and has thus limited the growth in investment. Today’s data suggests that this will continue into 2015.