INDICATOR: February Durable Goods Orders
KEY DATA: Orders: +2.2%; Excluding Transportation: +0.2%; Private capital spending: -1.3%
IN A NUTSHELL: "The demand for big-ticket items jumped in February but not for most products, which simply deepens the confusion about the state of the economy."
WHAT IT MEANS: Since people or firms don't go out and buy airplanes, motor vehicle, appliances or machinery every day, you expect the orders for these high-priced products to bounce around a lot. And they are doing just that. After falling sharply in January, durable goods orders surged in February. Unfortunately, most of the gain came from a large rise in aircraft orders, both defense and civilian. The aircraft builders will not be hiring large numbers of new workers right away as most of those orders are backlogged. So we need to look at other industries to see what is happening and there the situation is somewhat confused. It was nice to see that the vehicle makers experienced a sharp rise in demand and that could lead to some ramping up of assemblies and hiring. There was also a solid increase in the metals. But orders for communications equipment, computers, machinery and electrical equipment including appliances fell. The measure of business capital spending also was off, the second large drop in two months. That is an indication that executives are cautious about the future, or that the winter is just cratering demand and we need to wait and see what happens. You tell me and we both know. One positive sign was that order books filled for most sectors, which holds out hope that production and employment could improve in the months to come.
MARKETS AND FED POLICY IMPLICATIONS: It's nice that Boeing and the defense contractors are doing better, but we need a more broader-based rise in demand if the economy is to pick up speed. The relatively modest rise in non-transportation orders, which came after two large down months, coupled with a fall off in business capital orders point to a sluggish economy. Of course, that is exactly what the bitter winter was expected to create. Does this help us understand what is the fundamental condition of the economy? No. It does simply add to the uncertainty and also the potential that if the slowdown was weather driven, the rebound could be huge once spring actually appears. If we get the above 4% second quarter growth that I expect, it will likely create a lot of angst in the markets since the hawks at the Fed are spreading their wings. In this case, I agree that the Fed is likely to raise rates sooner rather than later as I have the unemployment rate below 6% by year's end. That has put me at or near the top of most forecasters for the past few months, but I stand with that outlook. Until we see the rebound from the winter, if it ever ends (how you doing in Boston this morning?), we will not really know a whole lot about where the economy is or where it is going.