INDICATOR: August Durable Goods Orders/Unemployment Claims
KEY DATA: Orders: Down 13.2 percent; Civilian Aircraft: Down 101.8 percent; Excluding Transportation: Down 1.6 percent/Unemployment Claims: 359,000 (down 26,000)
IN A NUTSHELL: “Consumers might be spending more due to rising confidence, but it is the fiscal cliff that is holding back business activity.”
WHAT IT MEANS: Durable goods orders are a key indicator of economic activity and confidence, as spending on big-ticket items only happens when there is optimism about the future. Well, orders cratered in August, posting the largest decline since January 2009.
So, is the economy going back into a recession? Hardly. Nearly two-thirds of the drop came from a collapse in civilian-aircraft demand. I doubt that Boeing is going to slow production and cut workers anytime soon.
In addition, almost 20 percent of the fall was due to declining vehicle orders, yet vehicle sales rose solidly in August to the highest pace since the “cash-for-clunkers” days.
And the government is cutting back on its aircraft demand as well, meaning that over 90 percent of the drop came from transportation.
Still, excluding this sector, durable goods orders were off, though the magnitude was nothing to be concerned about. The only area posting a gain was electrical equipment and appliances.
There was a rise in business capital spending, but it hardly offset the recent larger declines.
In a separate report, jobless claims plummeted, but don’t get too excited about that either. When they went up, I reminded everyone that these data are volatile, and this magnitude of decline is a clear sign that something temporary was at work.
The four-week average is back to a level consistent with job gains closer to 150,000 rather than the 96,000 we saw in August.
Lastly, the final (for now) estimate of spring growth showed that the economy expanded at a disappointing 1.3 percent rate not 1.7 percent, which was the last estimate, or the 1.5 percent initially calculated. In other words, there really was not much change in the overall picture.
MARKETS AND FED POLICY IMPLICATIONS: The headline number on orders was quite a shock, but the details, while weak, were not that terrible.
What is interesting to note is the chasm between business leaders and households. Consumer confidence is rising while retail, housing and vehicle demand is improving. You would think that would get the corporate juices flowing. But that is not happening.
Instead, business confidence is crashing, and the explanation is the fiscal cliff. And that makes sense. With Congressional leaders indicating that the election results will not change their views on taxes, an impasse is possible, and that would not be the greatest thing for the economy.
Without much cost, business leaders can wait a few months to see what happens before committing to spending on things such as capital goods or employees. Thus, we should expect weak investment and hiring numbers in the months ahead.
But we should also remember that these “don’t-spend-now” decisions could be unwound quickly when the uncertainty unwinds, and that would lead to a surge in orders and payrolls.
That is one reason I have argued that regardless of who is elected president, the economy is poised to surge early next year, as long as we don’t fall off the cliff.
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