Tags: durable | goods orders | pending home sales | economy

Demand for Pricey Durable Goods Has to Increase for Economy to Flourish

Image: Demand for Pricey Durable Goods Has to Increase for Economy to Flourish
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Wednesday, 27 Jul 2016 11:51 AM Current | Bio | Archive

  • INDICATOR: June Durable Goods Orders and Pending Home Sales
  • KEY DATA:  Orders: -4%; Excluding Aircraft: +0.3%; Capital Spending: +0.2%/ Pending Home Sales: +0.2%; Year-over-Year: +1%
  • IN A NUTSHELL:  “Big-ticket demand remains soft and that needs to change if the economy is to pick up steam.”
WHAT IT MEANS: The manufacturing sector has been buffeted by a variety of issues, including the strong dollar and the collapse of energy prices which led to energy-sector capital spending dropping precipitously.  The energy-sector cut backs may be stabilizing a bit with the move back up in prices.  However, there are still reductions occurring that are restraining overall investment demand.  Durable goods orders fell sharply in June, but the major reason was a sharp reduction in the very volatile aircraft segment.  Excluding both civilian and defense orders, which don’t lead to a short-term change in activity given the long lead times for these products, orders actually rose.  While that sounds good, the increases were not that broadly based.  Continued solid vehicle sales led to a jump in vehicle orders and there was an increase in electrical equipment and appliances.  But there was a reduction in orders for metals, computers and communications equipment.  Demand for machinery was essentially flat.  As for business capital spending, if you exclude government and aircraft, it was up modestly.  Up is nice, but there doesn’t seem to be a major drive on the part of the companies to invest heavily.
On the housing front, pending home sales moved up a touch in June after falling sharply in May.  The index surged in April but came down to more a typical level in May and the June index continues what has been a slow, but steady rise over the past few years.  That said, there is little reason to expect a major uptick in sales, if only because there is a dearth of inventory. 
MARKETS AND FED POLICY IMPLICATIONS: The Fed’s FOMC meeting statement is expected in a few hours, so investors will not likely react a whole lot to these data.  Will they have an impact on what the Committee says?  Probably not.  The housing market is getting better, but sales are not that great an indicator of the state of the sector since there are a limited number of homes for sale.  The limited supply is viewed as the major restraint to sales growth and is the reason we are seeing such solid increases in prices.   Until the energy sector stabilizes, there will be limited growth in durable goods orders.  Nothing new there.  In any event, the Fed members seem to search every meeting for something to worry about.  While most of the issues they were so concerned about at the last meeting have faded, that doesn’t mean they will say conditions have firmed enough to start thinking about normalizing rates.  So investors will wait and see and react to the statement.     

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm. To read more of his blogs, CLICK HERE NOW.

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Big-ticket demand remains soft and that needs to change if the economy is to pick up steam.
durable, goods orders, pending home sales, economy
Wednesday, 27 Jul 2016 11:51 AM
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