Tags: Naroff | durable | goods | orders

Businesses Cautious About Investing, But Demand for Big-Ticket Items is Growing

Friday, 24 August 2012 10:28 AM

INDICATOR: July Durable Goods Orders

KEY DATA: Orders: Up 4.2 percent; Excluding Aircraft: Up 1.4 percent; Capital Spending: Down 3.4 percent; Backlogs: Up 0.8 percent; Backlogs Excluding Aircraft: Up 0.8 percent

IN A NUTSHELL: “With the looming fiscal cliff, it is not surprising that businesses are cautious about investing, but the demand for big-ticket items is growing nonetheless.”

WHAT IT MEANS: One of the key indicators of business confidence is capital spending, and the demand for durable goods is one measure of corporate thinking.

The July numbers are confusing about what is happening in the economy.

On the one hand, durable goods orders soared, led by a nearly 54 percent surge in civilian aircraft orders. Excluding Boeing, as well as defense-aircraft demand, since neither lead to any major change in production in the near term, orders were still up solidly. That is because the vehicle sector is benefitting from growing demand, and vehicle makers adjust assembly rates fairly quickly with changes in sales.

And there were solid increases in orders for primary metals and computers.

However, this report also contained some real warning signs. Demand for machinery, communications equipment, electrical equipment and appliances was down sharply.

And the best proxy for business spending, capital goods orders excluding aircraft and defense, cratered for the second consecutive month.

At the same time, backlogs including private-sector capital goods are growing, so production should be increasing.

MARKETS AND FED POLICY IMPLICATIONS: With Congress apparently preparing to jump off the cliff without a parachute (no one ever accused our elected officials of having a whole lot of common sense), corporate decision makers are sitting back and watching with wonder and a whole lot of fear. Thus, investment has slowed.

That said, orders for big-ticket items are in great demand and that is filling order books; and rising backlogs generally lead to more output and hiring in the near term.

So, we have some really mixed messages in this report. The good is growing major purchases. The bad is growing cautious corporate capital spending.

For now, rising backlogs caused by increasing overall demand bodes well for the economy. But if corporate confidence continues to drop, future growth could slow.

How will investors view this report? I am not sure, but whatever the reaction is now, it probably will not matter in a week. The first revision to second quarter GDP, as well as a reading on consumer spending and income, come out next week.

How the consumer is doing will ultimately drive business decisions, and if growth during the spring was not as soft as initially believed, that could change perceptions.

We are in a world where the next number matters no matter how important it is, and with the data bouncing around so much, there is little reason to think that the equity markets will not be volatile as well.

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Friday, 24 August 2012 10:28 AM
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