Durable Goods Unexpectedly Fall In February

Orders for durable goods, a leading indicator of economic activity, fell 0.9% last month on a seasonally adjusted basis, the Census Bureau reports. The decrease follows a strong 3.6% gain in January. Economists were expecting a gain. Monthly data is volatile, however, and so it’s not clear if there’s something more ominous afoot.

For deeper perspective, let’s review the rolling 12-month change and put it in context with other economic indicators. From that vantage, the downshifting in new orders doesn’t look all that surprising. The annual pace of durable goods orders recently appeared to be running at an unsustainably high level, as the chart below suggests. Accordingly, the odds of trimming the proverbial sails have been higher than normal lately, and so perhaps we’re merely witnessing gravity reasserting its pull.

If this was a “normal” post-recession growth phase, there’d be little peril. But with the labor market showing only modest growth, the danger here is that persistently higher oil prices take a toll on sentiment.
“Persistent strength in durable goods orders should be taken as a sign that both consumers and businesses are confident enough in the economy to engage in spending on big-ticket items,” Pimco’s Tony Crescenzi explained in his book The Strategic Bond Investor. There’s been strong persistence in durable goods orders for much of the past two years, a signal that’s proven more or less prescient in signaling a broader albeit modest economic revival. Is there still persistence in new orders for manufacturers?
Yes, as the second chart below reminds. But with higher energy prices lurking, one might wonder if the persistence is headed for a rough patch. New orders for capital goods (ex defense and aircraft) have been slipping for three months straight (this slice of new durable goods orders is considered an especially useful window on the economic outlook). It’s debatable in real time where a routine downshift ends and something more threatening begins, although it’s not hard to imagine that buyers are becoming more cautious as energy prices rise.

MarketWatch notes that “oil prices are likely to remain supported as the U.S., U.K. and France continue airstrikes against the forces of Libyan leader Col. Moammar Gadhafi.” Accordingly, “Supply disruption still trumps participants’ concerns,” says Mike Fitzpatrick, partner at the Kilduff Group, in a note, via MarketWatch.
Perhaps it’s accurate to say that the Pentagon holds the key for the next move in the economy.
Update: In an earlier version of this post, the first chart above (Rolling 12-month % changes) mistakenly switched labels for durable goods and capital goods. The chart has been corrected: Capital goods are accurately indicated by the black line, durable goods are in red. Sorry for the confusion.