Decline In Durable Goods Indicative Of Broad Weakness
You may not have realized it this morning given the exuberance over Apple's earnings, however, economic numbers continue to disappoint. First, the release of mortgage purchase applications showed a decline 3.8% followed by a sharp decline in durable goods orders for March.
Although transportation was expected to pull down overall orders what was shocking was the sharp decline in core orders. Durable goods orders declined 4.2 percent in March. This followed a 1.9 percent rebound in February, revised down from 2.2 percent, which was only a small recovery of the 3.5% decline in January. Durable goods orders for the 1st quarter are down 5.75% overall which does not bode well for strength in 1st quarter's GDP estimate due on Friday. Even once the volatile transportation component was stripped out core durables decline 1.1 percent for the month and much lower than the estimate for a 0.4 percent rise.
In a bad sign for the big ticket transportation manufacturing companies the transportation component plunged a whopping 12.5 percent in March after rising a mere 1.8 percent in February. Subcomponent weakness was led by a 47.6 percent plunge in new orders for non-defense aircraft (Boeing orders) and motor vehicle production essentially flat. Apart from transportation, declines were broadly based. Decreases were seen in primary metals, fabricated metals, machinery, and computers & electronics.
This report aligns well with our Economic Output Index Composite (EOCI) which is a composite of several of the Fed Manufacturing Surveys, ISM, CFNAI and NFIB indexes. This composite index has tracked closely with durable goods historically and the recent deterioration in durable goods is a reflection of the declines in many of the recent surveys.
As we stated in "Mother Nature's Bailout"; the warm weather effect has now run its course. "...while we have been discussing this for the past several months, the media ballyhooed the "stronger" numbers during the winter period and dismissed the weather impact entirely. Now that more than 70% of recent economic reports have missed estimates they are quickly blaming the weather as the reason." Businesses are very sensitive to shifts in demand and there they are already starting to turn cautious about future investment in equipment. With the forward momentum beginning to slow it is likely that 1st quarter's GDP may be one of the strongest of 2012 without further bailouts and governmental assistance to prop things up.
What is interesting is that the EOCI index dipped below the 30 line in August of 2011 signaling that a recession was coming. This is only the second time in the history of the index that this has occurred. The last time, back in the late 60's the index dipped below 30 and recovered before slipping into a recession. The question, of course, is whether a recession has been avoided this time or if this is a similar story of a temporary bounce. The reality is that had it not been for the simultaneous collision of the following events we may have well been talking about a secondary recession in the U.S.
- The manufacturing restart combined with pent up demand from the Japanese earthquake/tsunami
- The implementation of QE 3 more affectionately known as "Operation Twist"
- The European LTRO's which alleviated European pressure.
- The Fed opening dollar swaps to international markets.
- A decline in oil prices to $80 a barrel from the $115 peak gave consumers a $60 Billion effective tax cut
- The warmest winter in 65 years gave consumers an additional $30 Billion effective tax cut on top of that.
- The extensions of tax cuts and credits
It is truly an amazing list of supportive effects that occurred simulatenously to prop up the economy. President Obama could not have stumbled onto better luck going into a re-election campaign cycle. The issue is now what happens as all of these items began to fade? The answer is simple, and obvious, and is the reason that the media and markets still crave more QE from the Fed. Over the next few weeks, as the seasonal weather patterns realign with normality we will begin to see what the "real economy" looks like. Don't be surprised to see more QE in the near future particularly if the economy slides during the summer months.