Durable Goods slide; Wall Street Jumps … Huh?

You know it’s been a boring week on Wall Street when a very middling sort of report is sliced and diced in order to justify a strong run up in stock prices. The boys needed toys.

What happened?

The report for August durable goods showed a decline of 1.3%. That’s generally not something to cheer about. Don’t forget that durable goods are the big expensive things in life, refrigerators and so on, that we fill our homes with. The report also covers business purchases of durable goods, only they are called capital goods and include the machines and other big equipment needed to deck out a factory or carry on a business.

Because durable goods are expensive they tend to be subject to famine or feast swings in consumption. People and businesses postpone replacing the old equipment in bad economies, and then rush out to buy new stuff when things have improved. So we tend to view changes in durable goods sales as a very significant indicator of where the economy is headed.

So why does a decline of 1.3% spark a 100+ point rally on Wall Street?

Because the boys went scratching around in the details for good news. They need good news to justify pushing stocks onto their clients, and they duly discovered it in the fine print of today’s report.

If you eliminate the even more volatile , and very big ticket, items covered in transportation – airplanes etc – the decline suddenly becomes a very respectable gain of 2.0%. Even better, when you isolate simply on new orders for non-defense goods, and then also exclude aircraft, you can conjure up a very nice increase of 4.1%.

Hey presto, you have a reason to run stock prices up.

Even better: since the average expectation of the Wall Street experts was a decline in August of 1.4%, that 4.1% looks terrific.

Now you may have noticed a certain cynicism in my commentary. You are right. That’s because I look at the consensus forecast of -1.4% and compare it to the actual of -1.3%, and see no reason to get excited at all. Durable goods orders and sales came in exactly where we expected. Since we are taught, ad nauseam, by the economists who prowl Wall Street, that stock prices are adjusted for a priori knowledge, and thus correctly reflect expectations, a report that differs by a meager -0.1% is not, indeed cannot be, cause for a rally of 100 points.

Or so they preach.

Obviously they don’t believe in free market economic theory down on Wall Street. But I never thought they did.

As for my thoughts on the data: I agree that the underlying trend looks reasonably positive. Durable goods statistics can bounce about all over the place so we should look at the longer term trends. Those are generally in the right direction. Businesses are definitely re-tooling, but rapidly. Households have postponed as long as they can, and are replacing what they can afford. There are no signs of a boom, but there is enough evidence to support the notion that the economy is growing, and that it will not relapse into recession.

This is all in line with the forecast of a period of slow growth. Third quarter GDP will show a jump because of the oddity we saw in imports during the second quarter; all the other categories are chugging along. Not great, but not awful. Welcome to a post recessionary mid adjustment economy.

Definitely not great. But absolutely not awful.

Ho Hum.

As to why Wall Street zipped up on that news: who knows? Who cares? They already proved they don’t know anything. The events of 2005 through 2008 bear witness to the financial ineptitude of those who occupy the seats on Wall Street. Why the media obsesses over the Dow Jones Index I have no idea. It’s meaningless, unless you own the stocks of the companies in the index.