Thursday, May 29, 2008

Sorting Out All the Spin in Durable Goods

There are times when I could literally just scream at the incredible amount of political bullshit that goes on with economic numbers. It just boggles the mind and frustrates the analysis. So, instead of relying on the news media to inform us, we are now faced with the task of sorting through the noise. What fun indeed.

According to the Census Bureau:

New orders for manufactured durable goods in April decreased $1.0 billion or 0.5 percent to $214.4 billion, the U.S. Census Bureau announced today. This was the third decrease in four months and followed a 0.3 percent March decrease. Excluding transportation, new orders increased 2.5 percent. Excluding defense, new orders decreased 0.3 percent.

This is where the first issue comes in. Notice we have the "ex-transportation factor" to deal with. Transportation orders represent about 25% of the durable goods numbers. In addition, transportation orders are very volatile. For example, suppose Boeing gets an order for 25 planes in a particular month. That would spike the overall numbers really high. But that reading would be a bit unrealistic as well because who knows when Boeing would get another order. So -- we usually get the numbers with and without the transportation variable.

What everyone is thrilled about is the ex-transportation number of +2.5%. That made everyone thrilled. But buried in the news headline is this information:

The 4.2% increase in nondefense capital goods excluding aircraft followed three monthly declines in a row. Analysts pointed to export markets, a source of strength for the U.S. with domestic demand weakening.

Given that piece of information, it's just as likely that the increase was a one time event that occurred as overall orders were going down rather than up. At best, the most we can hope for with that piece of information is to wait until next month to see if the upward trend continues.

And then there is this:

Orders rose 4.2% for machinery, 2.8% for primary metals and a record 27.8% for electrical equipment. Orders fell 1.3% for fabricated metals and 1.5% for computers and electronics.

The concentration of strength in orders for electrical equipment prompted Goldman Sachs economists to express some caution "against ascribing too much significance to this report."

So -- the jump is from a few specific areas of the report, not an overall jump in all or a majority of orders. That should tell us something. Reuters adds the following to that number:

However, electrical equipment orders surged 27.8 percent, the steepest increase on record, which analysts attributed to strong overseas demand that has been driven by a weak U.S. dollar. Machinery and primary metals orders also rose.

"The strength of global demand has greatly dampened the extent of the slowdown in manufacturing production, and in the light of today's orders numbers, it will continue to do so," said Nigel Gault, chief U.S. economist at Global Insight.

So -- overseas orders are probably responsible. This has been a good story for the US economy over the last half-year or so -- the increase in exports.

So, let's put all of these facts together to see what we come up with.

Durable goods orders ex-transportation increased 2.5% last month. This was the only increase in this figure in the last four months. Increases in machinery, precious metals and electrical equipment were responsible for the increase in the ex-transportation numbers. The most likely reason for the increase is the long-term downward trend of the dollar which makes US exports cheaper overseas.
Some analysts cautioned not to read too much into this increase because of the small number of areas in the report that contributed to the increase.

In addition, let's look at the general business background to see if all of this excitement about one number is warranted:

First -- the year-over-year change in durable goods is negative.

Companies are doing so well they are shedding workers, and

The unemployment rate is increasing

The ISM manufacturing number is below 50 and has been there a few months. This indicates we're in a contraction.

industrial production is dropping, as is

Capacity utilization

The Philly Fed is not doing as, and neither is the

Empire state survey

Construction spending is weak, as are

After tax corporate profits.

All of the above information says the number was a fluke and not the beginning of a trend. That could change. However, the great weight of the available evidence says no.