A Lot of Positives, So Why the About-Face?
The positives clearly outweigh the negatives in today’s report of durable goods orders. Not only did orders increase more than twice the consensus estimate, the gain came on top of a significant upward revision to the prior month’s orders figures. The actual percent change in the level of orders compared to the initial October reading show a monthly gain of 1.8 percent. The increase was fairly broad based, with gains across a variety of industry sectors from primary metals and machinery to electrical equipment and computers. The only significant drag was in the volatile aircraft component, and the weakness there was somewhat expected after Boeing announced a cancellation of some orders earlier this week.
The sudden turnaround in the trajectory of orders was not exactly what we were expecting. Given the big miss on the consensus forecast, particularly given the big upward revision to last month, we were not the only ones taken by surprise. While it is tempting to see the surge in October and November and surmise that business investment has turned the corner, we are not convinced these gains signal a meaningful change in business investment spending.
Our favored yardstick of business spending, orders for nondefense capital goods orders ex-aircraft, posted a second straight monthly gain and has returned to positive territory on a three-month average annualized rate. This is a remarkable turnaround considering the fact that this measure was falling at a 23.8 percent rate in September. As the top chart shows, this is the first time that measure has dipped so low without being followed by a recession in the past 20 years. A decline of that magnitude seemed out of step with the orders components of the various purchasing managers’ surveys. These measures of business confidence have been crossing the line between slow growth and modest contraction for months, and just as the big declines seemed overstated back in September, there is nothing here to corroborate a sudden burst of confidence in the business or manufacturing sector today.
Even after these gains, the overall level of durable goods orders is still 3.4 percent below where it was in July and 4.1 percent below where it was at the end of 2011. In other words, orders are still a far cry from where they were at the end of last year or even as recently as this past summer. Given how quickly business investment deteriorated this autumn, this could be just a bounce off a lower base. Another explanation might be that the expiration of the bonus depreciating in January is pulling forward demand. We will watch for further affirmation of a firming in business spending, but for now, we remain unconvinced.