US Durable Goods Orders preview: Consumers have questions

The US Census Bureau will release its Manufacturers New Orders for Durable Goods report for August on September 27^th at 12:30 GMT, 8:30 EDT

Forecast

Durable goods orders are predicted to fall 1.0% in August following July’s revised 2.0% gain, initially 2.1%. Orders ex transport are projected to rise 0.2% after a 0.4% decline.  Non-defense capital goods orders excluding aircraft and parts, a common analogue for business spending, are forecast to be flat after the revised July increase of 0.2%, originally 0.4%.  Orders apart from the defense sector will climb 0.1%, July’s total of 1.3% was revised from 1.4%.

Durable goods

Durable goods are a subset of retail sales. They are items designed to last three years or more in normal use. Products range from consumer purchases like Frisbees, lawn tractors and automobiles to business investment spending like commercial aircraft and backhoes and government procurement like fighter jets and aircraft carriers.  The lifespan requirement assumes that there is a different economic calculus for this category of infrequently purchases goods from that of items like food, entertainment and clothing.

Retail sales and consumer sentiment

Consumer spending has been robust for the last six months. The control group category of sales which informs the government's GDP figures, has averaged 0.733% monthly from March.  This is the best half-year performance in 16 years.  Household budgets have been supported by strong job growth and rising wages. The near historically low rates for unemployment and initial jobless are evidence that the labor market remains buoyant and continues to provide additional disposable for many people.

Despite the long running benefits of the labor market and the tangible results in consumption, both major surveys of consumer attitudes, the Michigan Survey of Consumer Sentiment and the Conference Board of Consumer Confidence dropped sharply in August and September.

The Conference Board score dropped from 134.2 in August to 125.1 in September, near the low of the last two years. The Michigan sank to 89.8 in August from 98.4 in July and recovered slightly to 92.0 in September. 

Reuters

It is as yet undetermined if this decrease in sentiment is the forerunner of a shift to less optimistic attitudes which might have serious consequences for the retails sales which are the all-important consumption component of GDP.

One clue to the disquiet comes from the Michigan Survey and the difference between the current conditions and expectations scores. 

Over the past six months the measure of consumers’ confidence in the future, expectations,  has dropped 11.1 points from 93.5 in May to 82.4 in September. Over the last half year the index of consumer’s satisfaction with their current economic conditions has fallen just five points from 111.9 in June to 106.9 in September. One data point is not a trend or an explanation but it a suggestion that perhaps the political anger in Washington and the unsettled nature of the trade war with China and even Brexit may be taking their toll on American attitudes.

Business sentiment and spending

The trade dispute with China has taken much of the optimism from the American business community. The purchasing managers’ indexes from the Institute for Supply Management in manufacturing and services have fallen sharply from their highs of 2018.

The manufacturing PMI has plunged from 60.8 in August 2018 to 49.1 last month. This is below the 50 demarcation between expansion and contraction, the first negative reading since August 2016 and the lowest reading since January of the same year.

Reuters

Sentiment in the much larger service sector has fallen from 60.8 in September 2018 to 56.4 in August, which is a recovery from the two year low of 53.7 in July.

Reuters

Business spending has followed the retreat in optimism. The non-defense capital goods ex-aircraft category of durable goods an often used analogy for  business investment  has seen its three month moving average decrease from 1.167% in June 2018 to -0.467% in December 2018. The rebound to 0.467% average in July is the best reading since May 2018.  

Reuters

Conclusion

The decline in US consumer sentiment is a potential problem for the economy. With business spending partially suspended by the China argument it has been consumers whose free spending ways over the past six months and more have kept GDP afloat. 

The 2% annualized growth in the second quarter has continued into the third according to the Atlanta Fed GDPNow estimate of 1.9%. That is roughly the pace expected with an active consumer and largely moribund business sector.

The threat to consumption of weakening consumer attitudes and to the overall economy is quite clear.