KEY DATA: Durables: +4.2%; Excluding Aircraft: +1.5%; Business Investment: +0.7%/Claims: 343,000 (up 7,000)
IN A NUTSHELL: "Demand for big-ticket items remains strong but the continued growth is not being translated into a lot more jobs."
WHAT IT MEANS: The economy is growing, but how fast? Good question. One indicator is purchases of big-ticket items and here conditions seem to be solid, at least in June. Durable goods orders surged, in no small part because of orders for both civilian and defense aircraft. Since Boeing is backed up to 2020 and the jet fighters will also not be delivered for quite some time, aircraft orders don't translate into new economic activity in the near-term. But excluding aircraft, demand still rose strongly. The vehicle sector led the way and as we saw from the Ford announcement this week, that does lead to more jobs. There was also an increase in the machinery and fabricated metals industries. Order books are building and in most sectors. Non-defense, non-transportation capital goods orders grew and that is a clear indication that business investment is continuing at a solid pace. However, all was not great with this report as a variety of industries, including communications, computers, electrical equipment and appliances, declined.
Despite three consecutive months or robust durable goods orders, the labor market does not seem to be benefitting. The weekly numbers bounce around like crazy but the four-week moving average, has been largely stagnant for several months. The level is consistent with gains in the 175,000 to 200,000 range where we have been for quite a while.
MARKETS AND FED POLICY IMPLICATIONS: The durable goods numbers were neither good nor bad. Demand for big-ticket items remained robust but the gains were not distributed across the economy. Until that happens, we cannot say that growth is going to pick up steam. Indeed, the spottiness in demand may be the reason we don't see any major improvement in the labor market. Consequently, the unemployment rate will fall only slowly so businesses will have little reason to raise wages. That is great for corporate earnings and equity prices but there is no way a consumer-based economy can grow strongly without solid increases in income. With benefits being cut and health care costs being shifted more and more onto workers, spendable income is falling. Thus, the huge gap between Wall Street and Main Street: Good earnings lead to high stock prices but high unemployment rates lead to low wage gains. That is the normal result of market forces and it explains why the economy cannot shake off its slow growth mode. Not to be a broken record but until the unemployment rate gets low enough that businesses start bidding for workers not workers bidding for jobs, strong growth will not reappear. How investors react to this number is anyone's guess since we are in earnings season. The Fed needs strong growth and an improving labor market to defend ending quantitative easing and we just may not be getting it. That may not stop the FOMC from moving but it does raise questions about the logic of any change in policy.