Wednesday, March 28, 2007

Durable Goods Orders Disapppoint

From Bloomberg:

U.S. durable-goods orders excluding transportation unexpectedly fell for a second month in February, jeopardizing the Federal Reserve's forecast for a recovery in investment.

The 0.1 percent drop followed a 4.0 percent slide a month earlier, the Commerce Department said in Washington today. None of the 35 economists surveyed by Bloomberg News predicted the decline. Orders for all durable goods -- those made to last several years -- rose 2.5 percent, less than analysts anticipated.

Companies are reluctant to buy new machinery and equipment until inventories are reduced, suggesting the economy may slow further, economists said.

``This raises a major warning flag for the economy,'' said Douglas Porter, deputy chief economist at BMO Capital Markets in Toronto. ``It casts some serious doubt on what had been a leader for the economy in the last year or two.''

First, the Year-over-year percent change in new orders was -.27%. Ex-transportation, the YOY change was +.68%. These numbers are not seasonally adjusted. Here's where the problem lies (also a link to the Census report):

Inventories of manufactured durable goods in February, up twelve consecutive months, increased $0.5 billion or 0.2 percent to $298.0 billion. This followed a 0.4 percent January increase.

12 straight months of inventory builds indicates 1.) there isn't a need for new orders -- and may not be for awhile, and 2.) the sell side of inventories is slowing.