Durable Goods: Rise Confirms Recovery

This morning’s news that durable goods orders rose for the fourth month out of the last six adds substantial weight to the expectation that we are well into a recovery. Durable goods are those large expensive things that businesses, particularly factories, use as they ramp up production and other activity.

That sales of durable goods rose by 1.0% in September is thus a good sign of more optimistic business expectations. That such expectations are being sustained – four increases out of the last six months is not too bad – confirms that business has a considerably more optimistic view of 2010 than they did for the current year. Given that investment is driven by such expectations – psychology intrudes everywhere in economics – we can use this data as supporting our prediction of growth in GDP next year.

Another key part of the report is the news that inventories continue to shrink: they fell 1.0%, marking the ninth straight month of decline. This is even more clear evidence of the part of the economic cycle we are now in. A fairly significant inventory adjustment is underway. That, and the government stimulus, should be enough to keep the overall economy growing well the remainder of this year.

As for 2010 … as I have said many times we will need something else to kick in. The durable goods orders hint at an increase in business investment, but there are few signs of a surge in that sector. For such a surge to occur businesses would have to be confident about the next two years. Right now they seem to be content to rebuild inventory and then play a waiting game to see what happens next. Of course the longer they all do that the more likely we won’t see a prolonged recovery.

Someone has to take the plunge. Who will it be?