Green Shoots Watch: All Orange!

Our mid week green shoots watch produces two contradictory data points:

Durable goods orders rose 1.8% in May, that’s better than expected, there have been gains in three of the past four months, and this is an excellent leading indicator of manufacturing.

Great. Ring the bells. Blue skies ahead.

Not so fast.

Sales of new homes fell 0.6% in May. That’s down from an April figure that was also revised downwards. It means that sales in may this year were 33% lower than a year ago. The unsold inventory of new homes is rising very slightly, rather than falling: it is still in the ten months range compared with a ‘healthy’ six months range.

Bad. Rotten in fact. We are doomed.

Not so fast.

The point being that we are at that stage of the recession where there are plainly signs of a bottom being reached. The durable goods orders are usually a very good indicator of future activity. They definitely show a slight improvement in the manufacturing outlook. But that is still way off. It will be a very long time before this slight change translates into many new jobs. For the near term layoffs will vastly outnumber new hires.

As for housing: there can be no surprise that housing will remain very bumpy. The one-time boost provided by the new home buyers tax credit is wearing off and mortgage rates are rising as the ten year bond rate goes higher. Both these will tend to stifle rapid improvement: they may even make things worse. Foreclosures are still running very high. Buyers appear to be waiting for further price cuts. And unemployment casts a long shadow over consumer willingness or ability to make long term purchasing commitments.

So today’s message remains one of caution. In a system of red, yellow, and green signals, we are decidedly orange still.