Durable Goods Disappointing
This morning the Census Bureau released the latest, and revised, durable goods data for April. While the headline was up it fell short of consensus expectations for a 0.5 percent increase — it was the core orders that unexpectedly declined. Headline durable goods, including the volatile transportation segment, made a slight 0.2 percent comeback in April, following a 3.7 percent plunge in March (the prior revised estimate was down 3.9 percent).
However, excluding transportation, durables declined 0.6 percent after a revised 0.8 percent drop in March (prior revised estimate was down 1.3 percent). The April decrease was much greater than the consensus expectations of a 0.7 percent rise.
The transportation component posted a 3.1 percent increase in April following a 2.3 percent rise in March. Strength was found in non-defense aircraft, up 7.2 percent, and motor vehicles, up 5.6 percent. Defense aircraft dropped a whopping 34.0 percent.
Apart from transportation weakness was widespread with declines in machinery and fabricated metals, computers & electronics and in electrical. The outlook for near-term business investment in equipment has softened over the last two months and new orders for non-defense capital goods excluding aircraft declined 1.9 percent in April and dipped 2.2 percent in March with shipments easing 1.4 percent for the month.
This data confirms the recent analysis that we have done showing that forward economic expectations are on the decline as the internals of the current economy continues to soften.
One thing of particular note is not to become lost in the month to month variations in the data which tell you very little about the trend of orders, manufacturing and the economy as whole. The chart shows durable goods orders on a year-over-year basis to identify the "trend" of the data. As you will notice durable goods orders tend to peak around a 20% annual rate of change, which generally coincides with a peak in economic activity, then steadily declines into the next recessionary cycle.
Post the 2008-09 recession durable goods surged to a peak of over 30% in March of 2010 which coincides with the peak of the economic recovery stemming from the bailouts, cash for "clunkers" and Quantitative Easing. Even with the subsequent injections of liquidity from QE 2 and "Operation Twist" the economy has simply "treaded water" on major economic metrics.
The Streettalk Economic Output Composite Index is a composite of the Chicago Fed National Activity Index (a broad measure of 85 economic components), 6 different Fed regional manufacturing reports, the NFIB Small Business Survey and a composite of the ISM reports. A reading below 32 has generally been a good predictor historically of potential recessionary events in the economy. However, in 2011, as the economy slid due to the Eurocrisis and the Japanese earthquake related shutdown, the economy was snatched from the jaws of recession by "Operation Twist" and LTRO's in Europe. However, with a negatively slopping trend in durable goods orders and weakness emerging in much of the manufacturing related indexes, with a more concerning decline in the future activity measures, the EOCI index is sitting on the "recessionary warning" line once again.
This is why we think that by August or September we will see the next inducement of liquidity support into the markets through a QE type program. As we discussed yesterday in "4 Issues For The Market Ahead" there are more than enough issues to stall the economy and put further pressure on the financial markets. In order for the Fed to launch further stimulative programs soon a weaker economy and stock market will provide the necessary ingredients. Until then, expect continued deterioration in the economic reports and employment figures which will likely translate into another bumpy summer stock market.