INDICATOR: June Durable Goods Orders and Weekly Jobless Claims

KEY DATA: Orders: +1.0%; Excluding Aircraft: +0.4%; Capital Spending: +0.6%/ Claims: +9,000

IN A NUTSHELL: “Businesses are ramping up their spending as the tax cuts are starting to kick in.”

WHAT IT MEANS: Tomorrow the first estimate of second quarter growth will be released and business equipment spending is expected to be a major driver of growth, if you believe the June durable goods and shipments numbers. Orders for big-ticket items were strong, led by large increases in defense and civilian aircraft, vehicles and electrical equipment. There was a big decline in computer demand and metals orders eased, but in general, this was a really good report. The key indicator of business capital spending, nondefense capital goods orders excluding aircraft, surged again. Firms may be spending most of their tax breaks on other things, but they are still putting a lot of money into capital equipment. With shipments surging, they are getting those goods delivered. Despite so much product going out the door, order books are filling, so expect manufacturing activity to be strong for a long time.

Unemployment claims rose last week, which should surprise no one given the previous week’s record low level. But the claims and unemployment rate data are not doing a good job forecasting wage changes, so maybe it is best to just report the number and not say much about the implications.

MARKETS AND FED POLICY IMPLICATIONS: We should get some really good news in tomorrow’s GDP report. Most estimates are in the 3.5% to 4.5% range. Today, the Atlanta Fed’s tracking number slipped to 3.8%, which is near the middle of the range. The first estimate is usually revised fairly significantly, but the markets look at it as if it is written in stone. Still anything around 4% would be a very good number and something we should be seeing given the magnitude of the tax cuts and the ramping up of government spending. That is what is taught in economics 101: Expansionary fiscal policy expands the economy and since we were starting at around 3% before the policies hit, something around 4% would be the minimum expected. But since it is just the first estimate, do not rule out something well above 4% or even something closer to 3.5% - there are too many components that are just not known with a lot of certainty at this point. For example the trade numbers are one month behind and given the trade issues, this number could change sharply as more data come in. My point is simple: No matter what the number is, don’t overreact. It is likely to change one way or the other. That said, a much bigger or smaller than expected could move the markets.