Today's durable goods report
brings mixed news for the economy. That's a good thing in the sense
that the numbers aren't uniformly discouraging. On the dark side,
headline durable goods orders fell last month, tumbling the most since
last August. On the bright side, so-called business investment—capital
goods orders less aircraft and defense—posted a strong gain in January.
Depending on your outlook, the macro glass is either half full or half
Let's start with the broad measure of new durable goods orders, which
slumped 5.2% last month. That's the biggest slide since last summer.
Most of the red ink was due to the volatile transport sector,
defense-related aircraft orders in particular. If we ignore transport,
durable goods order gained 1.9% in January.
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The business investment category did even better last month,
advancing 6.3%. That's the best monthly gain since December 2011. Some
analysts say that this measure of orders is especially sensitive to
corporate America's outlook and willingness to spend. The assumption
here is that rising new orders for capital goods ex-aircraft and defense
is a signal of better days ahead for the economy. Maybe, although I'm
not inclined to put too much stock in this indicator, at least not as a
lone metric. Like every other data series in isolation, its capacity for
flawless signals is limited.
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That said, here's how today's numbers stack up on a year-over-year
basis, which strips out a fair amount of the short-term noise. As you
can see, there's a mixed bag here for reading the cyclical tea leaves.
The broad measure of durable goods continues to reflect a weakening
trend. For the second month running, new orders overall decreased in
January relative to year-earlier levels—a troubling sign.
On the other hand, business investment's January revival elevated the
annual pace for this indicator to positive territory. Indeed, business
investment rose 4.7% for the year through last month—the best annual
comparison in nearly a year.
No matter how you read today's durable goods report, the profile for
January overall is relatively clear: The economy last month continued to
post modest growth. That's the message based on the three-month average of the Chicago Fed National Activity Index, and it's also a signal that shows up in The Capital Spectator Economic Trend & Momentum indices.
The report on durable goods always arrives near the end of the
monthly cycle for economic data and so by the time this indicator is
updated it's old news for looking in the rear view mirror. How much
value does the broad review of new orders hold for looking ahead? I'm
not impressed with its track record. Nonetheless, let's recognize that
the weakness in the year-over-year comparison for orders broadly defined
is troubling. It's unclear if this a smoking gun for business cycle,
but it could be. If it is, we'll receive confirming numbers from other
reports as the February data starts rolling in.
First up on that score is Friday's update on the ISM Manufacturing
Index. For the moment, analysts remain upbeat and expect that this
benchmark of manufacturing activity will remain comfortably over the
neutral 50 mark for February, suggesting that the economy will continue
to expand. Let's see how reality compares with expectations. Stay