Defense spending down, but business orders soar

Welder Evelio Quintero, from Fort Worth, TX, working for Southeast construction, does his best to repair a piece of machinery that has broken while they have been drilling horizontally underneath the Susquehanna River in order to get the pipeline down to Dalls PA from Springville, AP. (Michael Bryant / Staff Photographer)

INDICATOR: January Durable Goods Order

KEY DATA: Durables: -5.2%; Excluding Transportation: +1.9%; Business Investment: +6.3%

IN A NUTSHELL:  "The surge in business capital spending is a good sign that the economy carried so decent momentum into the looming sequestration."

WHAT IT MEANS: If all we looked at the headline number on the demand for big-ticket items, you would think the economy is cratering. But alas, as we all now, the real story is always in the details and the reason for the collapse in durable goods orders was huge declines in both defense and non-defense orders.  Meanwhile, the best measure of business investment, non-defense capital goods orders excluding transportation, rose sharply. Demand for machinery and electrical equipment led the way. Basically, except for Boeing, the private sector was looking to the future even as the sequestration risk continued to overhang the economy.  There was some weakness in computers and communications equipment, which does temper the good feeling of the report a little.  Inventories and non-transportation backlogs built, both signs that industrial activity should grow more strongly.

MARKETS AND FED POLICY IMPLICATIONS: This was a really strong report as it indicates that businesses felt confident enough to order a ton of big ticket items in January. Whether that good feeling about the future is sustained is a question given that Washington continues to put political purity above economic reality. The wackos failed to kill the recovery when they passed a fiscal cliff bill so they are back at it now. While the pain from sequestration may take time to build, if there are significant cuts, the economy is likely to take a major blow.  And if confidence is hurt, the damage could be a lot greater than just the numbers you get from cutting government spending by $85 billion over seven months. It will be multiplied.  That is what worries me the most.  But even if sequestration is dealt with we still have the debt ceiling issue facing us.  There is always something out there that Washington can use to play the games they like to play, regardless of the impacts on the economy.