Solid economic growth now does not compute
Economics in a nutshell: With the demand for big-ticket items faltering big-time, the prospects for solid growth this quarter grow dimmer.
INDICATOR: July Durable Goods Orders
KEY DATA: Orders: -7.3%; Excluding Aircraft: -1.5%; Computers: -19.9%; Capital Expenditures: -3.3%; Backlogs: +0.4%
IN A NUTSHELL: "With the demand for big-ticket items faltering big-time, the prospects for solid growth this quarter grow dimmer."
WHAT IT MEANS: September is right around the corner and that means the next FOMC meeting moves onto the monthly calendar. With tapering being the operative and most boring word in the economic lexicon, all data are viewed through the lens of Fed actions on quantitative easing. Today's report on durable goods orders was pretty bad. Even if you exclude the wildly volatile aircraft sector, it was still quite ugly. That was because of a huge cut back in demand for computers and related products. It is understandable that Boeing's orders ebb and flow but a massive shut down in computer purchases is something odd and eye opening. Are we talking about a sudden move toward cautiousness or just an unusual event? That is hardly clear but this component has been weak for a few months now. Arguing for something more disconcerting was a fairly large drop in orders for electrical equipment and appliances. Are households just not into large purchases? Maybe. Looking at business investment, it took a big hit as well. They had been growing through the spring. On the other hand, the vehicle sector keeps supporting growth and the sectors closely aligned with it, such as metals, were up. One strange aspect of this report was the data on order books. You would expect that with demand falling backlogs would be coming down. Instead, order books filled.
MARKETS AND FED POLICY IMPLICATIONS: It's good that with the Fed signaling so clearly that they are going to start tapering sometime in the future, we are getting such consistently strong economic numbers. Just kidding. As I have noted, ad nauseam, there is no clear cut trend in the data and while most economists including myself expect growth to improve over the rest of the year, that is not a done deal. We still have the budget to worry about and the biggest hurdle to growth this year has been fiscal policy. Another ugly, dumb sequestration/debt ceiling debate and we just might have to mark down not only third quarter growth but fourth quarter as well. Never underestimate the ability of our politicians to do the wrong thing. That said, why the FOMC would do anything in the face of all this uncertainty is beyond me. But why Mr. Bernanke said that tapering could start later rather than late this year is also something I cannot comprehend, so maybe I am the one that just does not get it. Oh, well. As for the markets, as one television talking head noted, traders seem to be more than glad to see the heroin flowing even if that means the economy has yet to improve. That is, as long as the Fed keeps propping up the markets, investors will take the money and worry about the economy some other time. That is why I noted last week that any economy number could be viewed by investors as being either good or bad, depending on which side of the bed they woke up on.