NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist
INDICATOR: December Durable Goods Orders
KEY DATA: Orders: -2.5%; Excluding Commercial Aircraft: 0.0%; Non-Defense, Non-Aircraft Capital Goods: +1.4%
IN A NUTSHELL: “The demand for capital goods on the part of business is still strong as it looks like investment will continue to boost growth.”
WHAT IT MEANS: Spending on big-ticket items, a key indicator of growth, seems to be holding up pretty well. Yes, durable goods orders declined in December but that was due to a 99% drop in civilian aircraft orders. It looks like there was only one order for a two seat Cessna. Obviously, this is a very volatile component but for all of 2010, civilian aircraft orders were up a massive 66% compared to 2009 levels. Excluding commercial aircraft, demand was flat in December. More importantly, though, was the measure of corporate capital spending, which rose solidly. Non-defense, non-aircraft capital goods orders posted a nearly 17% rise for all of 2010, a sign that businesses may not be hiring but they sure are getting their capital stock up to speed. The December report, though, was decidedly mixed. Orders for communications equipment, machinery and vehicles rose but were off for primary and fabricated metals, computers and electrical equipment and appliances. In addition, backlogs slipped and inventories rose. That is not the direction you want to see those categories go if you like expanding production.
MARKETS AND FED POLICY IMPLICATIONS: This was a decent though not spectacular report. Critically, businesses are spending money on capital goods and while that negates some of the need for workers, it still is a sign that the economy is moving forward. Investors will like this report but there was a huge weather-driven surge in new unemployment claims that may raise some eyebrows. The claims data have been bouncing around much more than normal with horrible weather (I am looking at about eighteen inches of snow outside my house) and government policy flip-flops messing up the normal patterns. Thus, don’t take the rise as pointing to a weakening in the labor market. But it is a warning that job growth remains softer than anyone would like and that is restraining consumer spending and overall economic growth. The FOMC focused on that problem in yesterday’s meeting statement. The January jobs report is a week away so let’s wait and see what comes out of those numbers. If there is any warning, it is that weather could play a major role in keeping the gains down.
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