NAROFF ECONOMIC ADVISORS, Inc.
Joel L. Naroff
President and Chief Economist
INDICATOR: September Durable Goods Orders
KEY DATA: Orders: -0.8%; Excluding Aircraft: +2.0%; Backlogs: +0.8%
IN A NUTSHELL: “Businesses continue to invest at a robust pace and that bodes well for not just current but future growth as well.”
WHAT IT MEANS: Can we finally put to bed the notion that the economy is teetering on the brink of a double-dip recession? Durable goods order fell in September but only because the hugely volatile aircraft sector tanked. Excluding both domestic and defense aircraft orders, where increases or decreases don’t do much to near term activity, demand for big-ticket items soared. Strong gains were reported in computers, metals, machinery and electrical equipment. The closely watched measure of business capital spending, non-defense/non-aircraft capital goods orders, jumped sharply. There were some declines in communications equipment and vehicles but with vehicle sales firming, that is likely to reverse in the future. Looking outward, the rising orders are causing backlogs to build dramatically and that implies industrial production and most likely hiring will be solid in the months to come.
MARKETS AND FED POLICY IMPLICATIONS: This was a robust report that continues the long line of data that indicates the economy did pretty well during the summer. It is hard to believe that businesses would invest heavily if they are not seeing the demand needed to support those expenditures. We get GDP tomorrow and I think it could surprise by coming in over 3%. Whether that calms nerves about the economy is a different story, since job gains continue to lag. Until payrolls rise more rapidly and the unemployment rate falls, the perception will be that the economy is in the dumps. Clearly, it is not. As for investors, it still seems to be about Europe and for fairly good reason. While most economists agree that the alternative to a decisive solution of the sovereign debt issue is chaos, that doesn’t mean the politicians believe that to be the case. So every time things look bright, the markets soar but when a solution gets pushed down the road, investors panic. Until a defensible policy is agree upon, look for market volatility to continue even if it appears that the U.S. economy is healing.
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