Today’s update on new orders for durable goods is just the thing to blow away the deflation blues that have been poisoning the party over the past few weeks. Spending was up in April for this leading indicator. Actually, that’s no surprise. We already knew that last month was loaded with encouraging reports. Industrial production and retail sales, for instance, jumped last month. And job growth in April was the strongest in four years. But it’s May that suffered a change in sentiment in the markets. Figuring out if it’s just a temporary blip, or something more ominous that will show up in the economic indicators will take time. Unfortunately, April numbers won’t help figure out what’s what, even if they look good.
Relevant or not, the 2.9% rise in new durable goods orders last month is a handsome gain. It’s the strongest monthly advance since January, and the fourth increase in the last five months. As our chart below shows, the overall trend in new orders remains firmly on an upswing through last month.
As always, the broad picture has a few warts when we look closer. Notably, new orders less transporation slipped 1% in April. Why should we review new orders without transportation? Economist Bernard Baumohl of The Economic Outlook Group explains in The Secrets of Economic Indicators: Hidden Clues to Future Economic Trends and Investment Opportunities
Orders for civilian aircraft occur in periodic bursts and are hugely expensive. When a large order is received, it swells the total value of new orders for a brief period, greatly exaggerating the underlying pace of demand for durable goods, only to plummet the next month when it returns to a more normal level. To eliminate these erratic movements, it’s better to study the behavior of durable goods orders without transportation.
A similar caveat applies with defense-related orders, Baumohl advises. All of which inspires looking at new orders over longer periods of time to smooth out the rough edges that can mislead on a monthly basis. Fortunately, the trend looks good on this front. As our second chart below shows, the rolling 12-month % change in new orders for durable goods has been showing signs of recovery for some time.
Or so the numbers through last month reveal. Will it continue in May and through the summer? The latest deflationary scare offers fresh reason for wondering, as we’ve been discussing, including here and here.
No one really knows, of course, but that never slows the guessing, informed or otherwise. What are the pundits saying? Here’s a few samples to consider…
“Look, a double-dip recession is a genuine risk — I’d place it at 20 percent as opposed to 5 percent a few weeks ago. We have some chronic problems in Europe, but I don’t see it leading us to a Lehman-style contagion. At some point, you revert to a focus on our fundamentals, and those are decidedly better than conventional wisdom has it.”
Robert J. Barbera, chief economist, ITG
New York Times
“Durable orders in general are holding up pretty solidly. That speaks to both consumer and business demand and I think orders are going to hold up for a while longer.”
Carl Riccadonna, senior U.S. economist, Deutsche Bank Securities
Bloomberg News
The big rise in overall orders was further evidence that manufacturing is helping to drive the rebound. U.S. companies are benefiting from rising demand both at home and in major export markets. However, there are concerns that a debt crisis in Europe could derail the global recovery. Financial markets have been roiled in recent weeks by fears that the problems facing Greece could spread to other heavily indebted European countries, such as Spain and Portugal.
Martin Crutsinger, economics writer
Associated Press
“We now have five quarters of increases, and that’s a good sign of transitioning from a recovery to sustainable growth. It’s too early to gauge the impact of the European crisis … probably have to wait until May or even July to see an impact.”
John Canally, investment strategist/economist, LPL Financial
Reuters