Signs of Life?

This is going to be a busy week for economic data, and today saw us off to a decent start. Orders for durable goods – those big ticket items that typically last a few years – rose 4.6% in December from an upwardly revised November.

There are two things to note:

One is that the bulk of the increase was due to a burst of aircraft orders. This is a notoriously volatile part of the industry and, since each aircraft is so expensive, the value of orders can bounce around in a wild dance. Today’s report is a great example of this volatility: aircraft orders plunged 12.9% in November only to shoot back up 10.1% in December. This is why we look at orders without such volatile stuff so as to get a better read on the underlying trends. When we take a look at that ‘core’ data we get a very different picture. Orders still are rising, but at the much more subdued pace of 0.2%. This is something we need to watch as we go into 2013. Overall orders were quite strong in 2012, rising 4.1% for the year, and 1.3% if we strip out transportation expenditures.

Second is that the discussion about the impact of Washington’s impasse and the arguments over government spending was less than it was hyped up to be in the press. It became almost axiomatic as last year ended to blame every quirk in the data on the so-called fiscal cliff or debt ceiling stand-off. In particular we were warned routinely by media experts that business investment was screeching to a halt as budget uncertainty and the prospect of higher taxes was forcing a hiatus on activity. Clearly this was not the case. December’s data – ex aircraft – was disappointing, but both November and October had been strong.

So let me repeat once again: what is holding back business investment is not the roiling nonsense in Washington, but the lack of demand in the economy that simply means additional investment is too risky to undertake. The clear upshot of this is that policy ought to be addressing this lack of demand and not be focused on giving away incentives – usually in the form of lower taxes – to businesses. The supply side doesn’t need help. The demand side does.

This is not difficult to understand. Unless of course your ideology forces you to avoid discussing demand side – aka stimulus – style policy.

It is unfortunate that our households and small businesses are being held hostage by the Republican party’s continued out of date thinking on economics. But that’s what’s going on, and looks set to continue into 2013.