Headline Durable Goods Orders Rise, But Core Capital Goods Falter
This morning, the U.S. Department of Commerce released its latest data on durable goods orders, and the report was another indication that the U.S. economy, which advanced 3.1% in the third quarter, continues to improve, but unevenly. Specifically, the report said that new orders for manufactured durable goods increased $1.6 billion (or 0.7%), to $220.9 billion, in November. The advance, which comes on the heels of a 1.1% increase in October, marked the sixth increase in the last seven months. The consensus expectation called for an advance of 0.2% last month.
When broken down into components, the latest durable goods orders data were semi-encouraging. Excluding transportation, new orders increased 1.6%. However, when backing out defense orders, new orders advanced just 0.8%.
Also, a bit troublesome was a $2.1 billion (or 2.8%) decrease, to $70.8 billion, in so-called core capital goods, which includes such items as computers and machinery. Economic pundits closely monitor the core capital goods rate as it is viewed as a good way of gauging business investment. Our sense is that the “fear of the unknown” right now regarding the “fiscal cliff” negotiations on Capitol Hill is keeping large corporations from ramping up their business spending. If this trend were to continue in the months ahead, we believe it would be very hard for GDP growth to come close to matching the 2012 third-quarter figure.
In conclusion, our sense is that the latest figures on manufactured durable goods orders are yet another indication that the U.S. economy is heading in the right direction, even if the improvement may still be selective and at a measured pace. However, the aforementioned core capital goods figure is troublesome and bears watching, as it suggests that U.S. businesses may be becoming less confident about their future prospects and are still not willing to increase their spending budgets on capital goods, especially if the automatic tax increases and spending cuts were to kick in on January 2, 2013. Such a scenario would likely lead to a considerable cutback in business spending and may stymie the nation’s economic growth.