INDICATOR: October Durable Goods Orders and Weekly Jobless Claims
KEY DATA: Durables: -2.0; Excluding Aircraft: -0.3%; Capital Spending: -1.2%/Jobless Claims: 316,000 (down 10,000)
IN A NUTSHELL: “Business capital spending has flattened, which would normally be a worry, but the improving labor market situation outweighs those concerns.”
WHAT IT MEANS: There was some good news and some not so good news in today’s data, which is hardly unusual in this economy. First the good news: Jobless claims fell sharply. The trend is clearly downward after a temporary rise that was largely due to the problems in Washington. We are at a level that if sustained, would point to solid job gains ahead. When I mean solid, I am talking about at least 200,000 per month and more likely 225,00 to 250,000. But we need those levels to continue and right now that is more hope than anything else. Still, the four week moving average tells me that the November unemployment rate will be down from the October level and it is likely to drop to 7.1% from 7.3%. There is also a good chance that the October payroll gain of 204,000 may not have been an aberration. I think the November number could be just a little below that gain.
As for the not-so-great news, durable goods orders declined as the ever-volatile aircraft orders plummeted. Excluding aircraft, though, demand was still off. Worse, the measure of business investment, durable goods orders excluding both aircraft and defense, fell sharply for the second consecutive month. It looks like businesses may have become a little more conservative looking out toward 2014. However, there were nice pops in vehicles, computers, electronic equipment and appliances. Consumers may be picking up their major purchase activity. There was a rise in non-aircraft order books so production should continue to be strong.
MARKETS AND FED POLICY IMPLICATIONS: The yin and the yang of the economy are seen in the data and today was no exception. For me, it is all about wages and household incomes will not start rising decently, let alone strongly, until businesses actually have to start paying up for workers. We are nowhere near that point. But the improvement in the jobless claims situation strongly hints at a decline in the unemployment rate and it is possible we will end the year at about 7.0%. It doesn’t take an heroic forecast to suggest that the Fed’s rough target of 6.5% could be reached by next fall. That is also when wage gains should start accelerating. So the good news for this Thanksgiving weekend is the time when the economy will shift gears may finally be coming into sight.