Big chill on big-ticket items

INDICATOR: December Durable Goods Orders

KEY DATA: Orders: -4.3%; Excluding Transportation: -1.6%; Business Investment: -1.3%

IN A NUTSHELL: "It looks like businesses decided to cool their demand for big-ticket items in December and that was before the really big chill hit this month."

WHAT IT MEANS: Ugly. Sometimes it is really easy to describe an economic report and that is the case with the December durable goods data. Orders were expected to be weak as aircraft sales surged in November, so a turndown in December was logical. But the weakness was not just for Boeing's products. Demand for all types of products including metals, computers, electronic equipment and vehicles also fell sharply. The measure of business investment also took a bit hit and this component was supposed to drive economic activity upward in the fourth quarter. Yet not all the numbers were worrisome. Despite the drop in orders, backlogs continued to build and if order books grow, production should expand.

MARKETS AND FED POLICY IMPLICATIONS: The disappointing, to say the least, durable goods report is likely to cause economists to scramble to revise their fourth quarter estimates. Business investment was expected to add significantly to growth and that may not happen. But these are durable goods orders and as everyone knows, they are about as volatile a group of numbers as we have. Did the bad winter weather, which did start in December, play a part in the decline? Was this just an adjustment to some excess inventory building that didn't get sold? It is unclear and we may not know what is happening with this economy for a long time. The January freeze out has likely cost the economy dearly in terms of jobs, production, productivity and growth. But a warm February (we can all hope) could turn things around dramatically. It may take until the March reports come in before we get a decent idea about the true nature of the economy. That is not likely to soothe the fearful beasts in the markets. However, the Fed members are distinctly aware that they should not base long-term decisions on short-term weather anomalies. The FOMC is starting its last meeting with Mr. Bernanke as Chair. Janet Yellen formally takes over on Saturday. I don't expect any change in the tapering and believe it would be a positive sign if the Fed continues to reduce the level of asset purchases. It is not good policy to react to every negative or positive set of numbers, especially ones that may be driven by temporary factors. If it was okay to start tapering in December, it should still be okay to continue the process just six weeks later.