Orders and Jobs: Have We Hit A Wall?

Durable Goods Orders:

On the surface this morning’s durable goods orders report is a good one: they rose 3.0% in January, which is a much better performance than most folks had expected.

However, when we dig beneath the surface the story is reversed quite dramatically. If we exclude aircraft orders, which shot up over 15%, everything else declined by 0.6%. The decline was fairly widespread across the economy so we cannot pin the drop on a specific, and compartmentalized, sector. Were February’s report to be a repeat of this news I would start to get a little more nervous about GDP later in the year. Durable goods are generally taken to be a decent, though not hugely accurate, indicator of the near future in the rest of the economy. This is because factories and other businesses place their orders for the big investment items that fall into the durable goods category in advance of expansion. So durable goods orders rise as businesses conclude that their future sales are likely to rise.

Conversely a drop in orders signals a hesitancy on the part of business to invest. So toady’s news is not a good sign. Having said that we should not leap to dire conclusions on the basis of just one data point or month’s worth of information.

As I said above: February’s report now takes on more meaning.

Obviously the fact that total orders rose is not a bad thing at all. My guarded reaction stems simply from the fact that the momentum was contained solely in the very volatile aircraft sector. Because of the huge cost involved in aircraft orders that part of the data bumps all over the place and so we generally remove it to get an idea of what is going on across the economy. January is one month where that decision reveals something we all wish was not happening.

Claims For Unemployment Insurance:

One of the reasons we are all hyper-sensitive to the monthly blips in the various economic reports is that the employment situation depends so strongly on our ability to get general economic activity going at a sustainable positive rate.

This mornings report on claims for unemployment assistance simply underline the need we have. Claims rose again, by 22,000 to 496,000. This is the sixth week, out of eight, that claims have risen this year, and we are perilously close to having given up all the good gains we saw at the end of 2009. Clearly the job market is stalled. Almost every subcategory of the report tells the same story and so , just as in the durable goods data, we cannot place the blame on any particular sector. This is a generalized problem.

Some analysts are claiming that the great wave of firings is now over, and that implies the next wave, that of hiring, is just around the corner. I have a more jaundiced view: the wave of firings may be over, but it isn’t yet finished. The new claims data is rising slightly which means there is still a steady trickle of people being fired. And we seem to be a very long way from a hiring ‘wave’. So far away that it is hard to envisage one this year.

My argument goes this way:

Employment is a lagging factor. This means that businesses both fire and hire after they see a turn in the economy. The durable goods index I talked about above is a leading factor meaning that businesses place orders ahead of a turn.

Let’s put both today’s reports together: the leading indicator, durable goods dropped. I know it only one month so let’s wait for a month or two before we get to firm in our conclusions, but for the sake of my argument I am going to say that the drop in orders suggests a drop in business expectations about sales later this year.

That pull back in expectations is based among other things on the poor consumption data we have been seeing which the very poor consumer confidence numbers released this week support.

So businesses see no reason to build capacity to meet future sales since they don’t expect sales to surge.

Plus current capacity is more than sufficient to meet any increase in demand: the economy is operating between 6% and 8% below capacity. Consumption would have to soar for businesses to hit a ceiling and need to add to capacity. And soaring it is not.

Now, back to employment.

Since hiring is something businesses do after they face an increase in sales, and since I see no indication of a surge in demand sufficient to drive businesses close to their capacity constraints, I have to conclude that the jobs market is going to fester in its current limbo.

I think my slightly jaundiced view is backed up by the data, and that the optimists are selling us a story they want rather than one they can justify on the facts.

In view of this argument it is easy to see, I hope, why I think the so-called jobs bill that just squeaked by in the Senate is a derisory waste of time. It weighs in at $15 billion. Which is tantamount to zero in the context of both the size of the economy – which is the region of $14.5 trillion – and the size of the problem. The fact that it is next to impossible to get legislation passed to get help out where it matters suggests to me that Congress either doesn’t realize what’s going on, or it doesn’t particularly care. Given the invective spent over the last two years and the blather about the crisis I can only conclude that it is the second of these two explanations that is true. For some reason Congress doesn’t care.

Which is a shame, since all this week’s reports should be flashing a great big warning sign: this recovery, such as it is, remains on life support.

All the risks – the factors that could change the course of events – are negative. Meaning it is far more likely that the economy will slow down than it will speed up.

All in all this week has produced a stream of data showing an economy that has moved up from the nadir reached last year, but which is now struggling to maintain any kind of forward momentum. We need a boost from somewhere, but it is hard to see where it could come from.

So I stick with my forecast of 1.5% to 2.0% growth in 2010 GDP for now.