Tags: new orders | data | indicator | stocks

Economic Data Provide a Warning for Stock Market

By    |   Friday, 30 January 2015 09:32 AM

New orders for durable goods are a reliable indicator of future economic activity. In any economy, new orders drive manufacturers to increase inventory and provide work for production employees. If the level of orders is rising, the economy should be expanding.

When new orders decline, economic contraction and recessions often follow.

Because new orders lead to manufacturing employment, new orders are a leading economic indicator. Although unemployment data capture more headlines, the trend in employment follows the trend in new orders. That means investors should pay more attention to new orders than to employment or other lagging indicators.

From month to month, the dollar amount of new orders is highly volatile. To see the longer-term trend in new orders and the economy, I look at the level of orders compared with six months and a year ago.

The last time we saw a sustained drop in new orders was in 2012.

At the same time we saw the last 10 percent decline in the stock market.

In December, new orders dropped below their level of six months ago, providing a warning sign to stock market investors. Orders are still higher than they were a year ago, indicating the economy is expanding slowly, but next month's report will be important to watch.

Another decline in new orders will indicate stocks could be due for a significant pullback.

For now, economic data remain on a buy signal for stock market investors, but it's weakening. New orders will be important to watch in the future as they have been in the past.

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New orders for durable goods are a reliable indicator of future economic activity.
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Friday, 30 January 2015 09:32 AM
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