New orders for durable goods rose by a healthy 4.2% last month, according to the U.S. Census Bureau, but the increase is marred by the ongoing drop in a widely monitored subset of these orders: business investment, defined as new orders for capital goods excluding aircraft and defense. Does the ongoing weakness in business investment tell us that we should ignore the otherwise encouraging news for broadly defined durable goods orders? If there are more clouds on the macro horizon than the top-line number suggests, what does that imply for the economy? In search of some perspective, let’s take a closer look at the numbers.
What is clear is that new orders overall have been reviving in recent months, gaining 4.2% in July—the best month since last December. It’s another story for business investment, which slumped again last month by 3.4%, the biggest drop since last November.
For a clearer look at the trend, let’s turn to rolling 1-year percentage changes. Unfortunately, today’s update also delivers a mixed bag on this front. Although top-line durable goods orders appear to be stabilizing at a 5%-a-year-growth pace, business investment continues to weaken on a year-over-year basis. For the second month in a row, in fact, business investment fell relative to a year ago. We haven’t seen such a run of negativity since 2009, as the second chart below reminds.
The question, of course, is whether the deterioration in business investment is signaling trouble for durable goods orders generally (and the broader economy) in the months to come? That’s certainly a risk at this point, and a growing one, according to history. The relatively tight correlation between these two measures through time tells us that one or the other is due for a correction in its respective trend. Quite simply, this divergence can’t last much longer. Either top-line durable goods orders are set for a bigger fall, or business investment will improve.
“There’s uncertainty domestically about the tax environment, and there’s uncertainty globally about the outcome of the European crisis,” Millan Mulraine, a senior U.S. strategist at TD Securities, tells Bloomberg. Not surprisingly, this climate is “not engendering business investment and hiring. This would bolster the case for the Fed, suggesting that the soft underbelly of the recovery may be extending into the third quarter.”
But does that leave open the possibility that business investment revive if the uncertainty fades? If so, when will the uncertainty fade? What might trigger such a decline in uncertainty? And if we don’t receive more clarity soon in favor of growth, is the slumping trend in business investment destined to lead the rest of the economic indicators into darkness? Once again, there’s a fresh round of uncertainty to ponder. As usual, the answers aren’t available in real time… yet.
What to do? We can start by looking for signs that negative trend in business investment is spilling over into other indicators. That’s going to take a few weeks, however. To be precise: Will we see deeper troubles in more indicators in the August read relative to the generally upbeat trend numbers for July? Stay tuned…