D.C. shutdown chills durable goods orders

INDICATOR: September Durable Goods Orders

KEY DATA: Orders: up 3.7%; Excluding Aircraft: up 0.3%; Capital Spending: -1.1%; Backlogs (Non-Aircraft): up 0.2%

IN A NUTSHELL: "Businesses took the logical step of becoming more cautious in face of the looming government chaos and durable goods demand rose modestly."

WHAT IT MEANS: With Washington about to implode and possibly take the economy with it, what would you do if you had to make a decision concerning purchasing big-ticket items? Exactly. You would decide that it might not matter if the order was held for a month or two. Durable goods order soared in September but only because of huge increases in both defense and non-defense (Boeing) aircraft demand. Otherwise, purchases of major items rose much more modestly. Still, there was some positive news in the report. Orders for computers, communications equipment and primary metals were up strongly. Though vehicle orders eased, that came after large rise in August. That modest pullback indicates that the sector seems to be continuing its rebound. On the other hand, orders for things such as appliances, electrical equipment, machinery and fabricated metals fell. Also, the best measure of private sector investment spending, capital goods orders excluding both aircraft and defense demand, was off sharply. This is a volatile segment but it seems to be on a downward slide and that is not good news for the economy. Order books continued to grow and that should lead to more production going forward.

MARKETS AND FED POLICY IMPLICATIONS: The economy may not have been roaring along before Washington decided to see if it could crash everything, but at least it was growing. It looks like in September, firms took out some insurance against the possibility of a real disaster by putting off until tomorrow what they could have done today. Their decisions made sense as our political friends did the unthinkable. We are likely to see some pretty ugly October data as well, which means the November data may be really good if there is some catch up. Basically, what I am saying is that it will be months before we can decipher what is going on in the economy if households and businesses changed their behavior because of the Washington follies. Investors are likely to be as confused about the economy as everyone else, including the Fed members. Since uncertainty at the Fed means no action on tapering, those who like their liquidity drugs will be very happy campers, at least for a while longer.