Durable Goods Orders Post A Surprisingly Strong December Gain

Durable goods orders increased by a surprisingly strong 4.6% in December, closing out the year with the highest monthly gain since September. The increase was nearly three times above the consensus forecast of 1.6%, based on Econoday’s estimates. Much of the gain was due to a sharp rise in aircraft orders, a volatile component that often trips up many short-term predictions for this series. Excluding transportation, new orders for durable goods still advanced, but by a considerably lesser 1.3% pace. Business investment (capital goods orders less defense and aircraft), by contrast, increased a tepid 0.2%, which suggests that corporate America’s appetite for laying out large sums of money for plant and equipment remains sluggish.

Nonetheless, it’s hard not to notice that that new orders in the last three months have been growing. That’s a notable change from the summer.

Stepping back and looking at the broad trend, however, still looks discouraging. The year-over-year change in new orders is treading water at best. The two-year deceleration has left the trend meandering in flat-line territory. It’s unclear if this is just a pause before persistent declines infect the numbers vs. a respite in advance of stronger year-over-year comparisons in 2013.

The good news is that most of the other economic indicators reflect moderate growth through December. From industrial production to retail sales to housing starts, for instance, the big picture is that the economy was firmly if not dramatically moving forward through the end of last year. That’s generally been the message all along, as the updates to The Capital Spectator Economic Trend Index have shown recently (including this update from a few weeks ago).
It’s not exactly clear why new orders have been so sluggish recently compared with other economic series. Some blame on uncertainty linked to the fiscal debates in Washington, or the lack of strong growth generally in the economy. Whatever the reason, the weakness in durable goods orders should be treated as an outlier unless we see deterioration in a number of other key indicators. New orders are modestly useful for analyzing the business cycle, but as a lone variable in isolation these numbers should be taken with a grain of salt. The tail should never wag the dog when it comes to evaluating macro trends. That’s true for any one time series, of course, and the caveat is especially relevant for durable goods orders.