Tuesday, September 23, 2014
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Believers buying big-ticket items

Economics in a nutshell: Consumers are confident and that is leading to purchases of big-ticket items and more business investment.

Believers buying big-ticket items

In this Wednesday, May 8, 2013 photo, new 2013 Ford Fusions are seen at an automobile dealer in Zelienople, Pa. The Commerce Department reports on business orders for durable goods in May, on Tuesday, June 25, 2013. (AP Photo/Keith Srakocic)
In this Wednesday, May 8, 2013 photo, new 2013 Ford Fusions are seen at an automobile dealer in Zelienople, Pa. The Commerce Department reports on business orders for durable goods in May, on Tuesday, June 25, 2013. (AP Photo/Keith Srakocic)

INDICATOR: May Durable Goods Orders/June Consumer Confidence

KEY DATA: Durables: +3.6%; Excluding Aircraft: +0.9%: Business Investment: +1.1%/ Consumer Confidence: 81.4 (up 7.1 points)

IN A NUTSHELL: "Consumers are confident and that is leading to purchases of big-ticket items and more business investment."

WHAT IT MEANS: When the demand for big-ticket items goes up, it is usually a sign that the economy is improving and that seems to be the case right now. Durable goods orders surged again in May and it wasn't just Boeing. Okay, nondefense aircraft demand rose a huge 51% but there were also solid gains posted in just about every other area. Primary metals, machinery, computers, communications equipment, electrical equipment and appliances all were up. The only red numbers were in fabricated metals and motor vehicles. Since the vehicle sales are improving, the decline is likely to be temporary. As for business investment, capital spending excluding defense and aircraft is on a major run as gains have been solid for the last three months. That points to another good-sized addition to growth in the spring quarter.

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We need strong and rising consumer confidence for households to be willing to purchase those big-ticket items and that is the case. The Conference Board's Consumer Confidence Index jumped in June to its highest level in over five years. Views on current conditions, future conditions and the job market all improved solidly. The only negative was a decline in those who thought their incomes would increase in the near future. That is a worry as the only way the rise in confidence turns into long-term consumption gains is if income growth accelerates.

MARKETS AND FED POLICY IMPLICATIONS: At least through May, the economic recovery was on track. I say at least through May because last week the Fed Chairman, Ben Bernanke took it on himself to see what he could do to slow things down. He said he was deputized to explain the FOMC's view on removing quantitative easing and he did. He should not have. Mr. Bernanke doesn't do well explaining things, which is something that is actually a good trait for a Fed Chair. Indeed, Alan Greenspan once said, "I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said". Mr. Bernanke may have been too clear and misunderstood. It is hard for me to believe that the Fed will back off the accelerator if economic growth is sluggish over the rest of the year. The consensus is for another 2% or even less growth (I am at about 2.5%) for the spring quarter and not much more for the summer. That is not a growth rate that would create the impression that the economy can stand on its own. But Mr. Bernanke did not provide the usual caveats that the growth rate has to be solid and the economy clearly moving ahead at a pace that leads to continued gains in the labor market. He referenced the Fed's own forecast, which implies continued modest growth this year. That is why the bond and the equity markets are so volatile. The open-mouth policy, generally called "better communications" - something that I have made fun of for years - has created real problems and it will be interesting to see if the Fed walks those comments back.

About this blog
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm in Bucks County. He advises companies across the country on the risks and opportunities that economic developments may have on the organization’s operating environment. An accomplished public speaker, Joel’s humor and unique ability to make economics understandable have brought him a wide following. Reach Joel at joel@naroffeconomics.com .

Joel Naroff
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