durable goods orders

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Mixed Capital Goods Spending

Just a brief note on today’s durable goods orders. They fell slightly – by 0.1% – in August, which suggests continued sluggish growth for the economy as a whole. The decline was driven, excuse the pun, by a 8.5% drop in motor vehicle purchases by business, and by a 5.7% decline in large defense goods. Other categories of durable goods showed a much more robust pattern with technology related equipment doing particularly well. So while the headline figure is a disappointment it is largely the result of large shifts in some sectors which were not completely offset by only decent sized shifts in others. Orders for computers, for instance, rose 5.5%, and orders fro communications gear rose 7.7%. Both these latter categories had experienced large declines the month before, so we ought to average through the two months to arrive at a better understanding of the overall trajectory for orders, which is not as bad as today’s report indicates by itself.

This is not to suggest that the numbers were strong. I am simply pointing out that this is yet another report that supports the general picture of sideways drift.

Shipments of durable goods – as opposed to orders – rose only 0.2% in August. Since this is what shows up in GDP accounting I think it safe to assume capital goods spending will continue to provide a very modest boost. Meanwhile inventories rose 0.9%. How we interpret this is difficult to say. I would be surprised if it represented an effort by business to stash away goods because they predict stronger sales in the next few months, so the more likely story is that this was an accident of accounting and timing that will fade away next month. Still it is something to watch. The bigger questions surrounding the outlook for growth are all about personal consumption. And that remains steadfastly stuck.

What does this mean for GDP? I see no reason to change my opinion that the economy will plod along at between 1.5% and 2.0%.

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The Long Slowdown Continues

One of the things I find most odd about our economy, perhaps dispiriting is the better word, is that no matter how hard I try, I find it difficult to become truly upbeat about it. We appear stuck in some gigantic rut the boundaries of which prevent us from breaking free and getting back anywhere close to a strong sustainable, and some cases even noticeable, recovery.

Indeed for all intents and purposes the recovery is looking more like a statistical quirk rather than a true increase in across the board activity.

This morning’s news that durable goods orders dropped 3.6% in April is hardly the stuff of great growth. It is, rather, yet another sign that whatever team we had is fast dissipating. I realize that a large part of the decline was in aircraft and autos, both very volatile areas, but the residual decline was still 1.5% a very poor performance for an economy supposedly growing. This makes the third decline in the past four months, and as I have said before, at some point we have to stop defending these declines as being oddities and simply admit that things are not very good.

Couple this with the fact that home prices, according to the Federal Housing Finance Agency, dropped a further 2.5% in the first quarter, and its hard to generate much enthusiasm at all for where we are.

Profits are good. That’s about it.

Does anyone care?

Not that I can see. The economy is still way underperforming. We have excess capacity sitting around unused. Corporations have mountains of cash idle and are chronically underinvested. In the interest of a perceived and false need for austerity most of our states are cutting into the muscle we rely upon to produce future wealth – education is being slammed even though politicians the country over bemoan our lack of skills to compete. And our totally dysfunctional political system replaces policy debate with outright lies and contradiction.

This political gridlock is compounded by the monoculture that pervades the country. Everyone in power, whether in politics, business, banking, or the support areas like academia, have all fallen under the spell of market magic economics and its associated finance, law, and accounting expressions. The problem with monoculture is that it leaves us few degrees of freedom in our decision making. By being so clustered around the same set of ideas our elites have squeezed out any real debate about alternatives. The thrall of those ideas is debilitating. The elites benefitted from them by way of excessive profit, outlandish incomes, a complete breakdown in ethical conduct, and an ability to establish rent seeking opportunities at our expense, but the game is slowly ending. Their self-referencing system became enormously efficient in hoarding and allocating wealth within the elite. But like all systems when it becomes too efficient, it lost its ability to adapt. It has one response to all problems: more market magic. This doesn’t work too well when it is market magic that is the source of the problem.

Deregulation opened up opportunities for profit. The bias in wealth creation was to move it upwards. The last three decades have been a spectacular success for the social engineering envisaged by right wing ideologues and their economist enablers. But the well has run dry. Now there is little left to re-direct upwards. To keep up the same pace of wealth accumulation at the top, the elite now has to undermine the last bastions of the middle class – Social Security and Medicare.

They may find this difficult to do. Yesterday’s special election in western New York produced a warning: a reliably Republican seat fell to a Democrat whose message was centered around an attack on the Ryan plan. Perhaps this was a sign that even our supine middle class can be shaken into resistance. We will have to wait and see.

Meanwhile the language and policies of the elite rely on worn out ideas spawned decades ago and brought to life in the think tanks and business schools of the 1970’s and 1980’s. Those ideas pre-dated the internet. They conditioned the thinking of millions of managers now at the helm of business. They became the core language of both political parties. They framed our regulatory and legal discussions.

And they undermined our economy.

We lost our way because we lost our balance.

We applauded greed and self, and used that to justify the defunding of community. Things like the notorious anti-property tax Proposition 13 in California stand out now as monuments to a false doctrine and an abandonment of standards. Likewise the long standing and successful effort to deregulate banking, which merely created opportunities for a few people to amass wealth at our expense and to create the illusion of a healthy economy despite the onset of rot at its center.

When such an elite is so committed to itself, and is so resistant to new ideas, it will lead a nation into the wilderness. Our long stagnation is testimony to that. Looking back over the past decade we can rightfully argue that our current slowdown began years ago. The entire Bush era produced little true energy or lasting economic growth. Profits boomed. Wages stagnated. Real estate sucked in wealth to the detriment of productive capacity. Standards were lowered. Discourse undermined. Ordinary families struggled while a few, a very few, wallowed in golden age style luxury. The whole thing blew up in an orgy of misdirected greed and ignorant investing.

And now they want to persuade us that we cannot afford what’s left of the middle class lifestyle. Or that this recovery amounts to more than we all feel it is.

The only reason we are having a debate about debt, inflation, or the deficit is because those things matter to the wealthy. They’re the ones who would suffer most were our current budgetary problems to persist. The banks stand to lose. As do creditors generally. So austerity protects them by shifting their potential loss onto those who can least bear the burden. This is so short sighted it is almost beyond belief. But it doesn’t surprise me. The long slowdown is their creation. It is the logical outcome of decades of economic mismanagement and the application of false economic doctrine. They now need to save themselves. Which is why the media latches on the even the most stupid of plans when presented as a savior. And it is also why the media finds it hard to act as a neutral critic: it too has lowered its standard, and is populated by people educated or raised within the bubble of the market magic belief system.

Maybe they will all succeed in plastering over the cracks and arguing that this stagnation is the best we can achieve. maybe they are content with the story that we have to settle for less and that our great entitlement programs are no longer affordable.

When you hear this line of reasoning ask yourself how we arrived here. Who led us here? What were there ideas? Who benefitted along the way?

Above all else we need to wonder out loud why it is that the American economy, deep as it is in natural resources, talent, and and tireless workers needs to abandon its poor, its elderly, its sick, and its young. Why is that?

My guess is incompetent leadership. Rotten lessons taught by misguided professors to decades worth of students who are now faithfully leading us astray as they implement outmoded ideas and false economics.

They may defend their profits. They may still have all those bank branches. Those legal and accounting fees will provide for several homes for each partner. They will still enjoy those very important summit meetings where those who know rub shoulders with those who do stuff. They will still donate some of their wealth to great charities to spread the wealth a little.

But will they have paying customers?

Will the demand be there?

Do they care?

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A Mixed Bag

The economic news this week has been a mixed bag. There is no news in the report that the National Association of Realtors is going to adjust its data – they have been giving us what appear to be wildly optimistic reports throughout the crisis. Neither should we be surprised about the slide in durable goods orders. Typically those orders lead the recovery and tend to taper off a bit once the economy is out of recession. But enough of that, here are the bits and pieces so far:

Housing

  • According to the Case-Shiller index home prices dipped slightly in December. The drop, 1.0%, was slight but significant because it tells us that there is no sign of a resurgence in housing. The more amusing news is that Karl Case and Robert Shiller interpret the news in different ways. Case is less pessimistic and suggests there is a “chance” we are at the bottom of prices. Shiller, however, is now talking of the “substantial possibility” that prices could drop another 15% or so. So which is it? Are we at the bottom? Or will prices drop some more? Who knows? Certainly not economists trained in the orthodox school. They are the ones who argue we cannot tell whether there is a bubble to begin with. I remain unconvinced that real estate has reached a true bottom.
  • Take, for instance, the low level of new home sales, which fell 12.6% in January and thus wiped out almost all the 15.7% gain in December. Most of us thought the December number was inflated by a last minute rush by buyers to take advantage of various tax breaks that expired at the end of the year. But the size of the drop in January is still quite disturbing. And how do we make sense of the last two months in the West where sales rocketed 62.5% in December only to collapse 36.5% in January? Yes there was a California tax break, but what is the trend? Is there a trend? Meanwhile January sales were up 54.5% in the Northeast, where the weather is often used to explain away odd winter dips in data, but surely cannot explain such a surge. Further: the inventory of unsold new homes is now down to 188,000 its lowest level since 1967. That hardly speaks to an optimistic view on the part of home builders.
  • In contrast, the sales of existing homes has edged up steadily in five of the last six months. Unfortunately it is this data series that is most untrustworthy since it is produced by the realtors themselves who, obviously, have an incentive to goose the numbers. This week’s report was accompanied by an explanation that sounds too good to be true: job growth, improving economic news, higher stock prices, and rising rents – everything but the kitchen sink – were given as reasons January’s 2.7% increase in sales. All of which may be true, but we should also note that prices dropped as well, by 3.7% to their lowest since 2002. Perhaps sales are up because prices are still weak?

Durable Goods:

  • Orders finally showed some life in January after being relatively weak the previous three months. Unfortunately the growth was almost entirely due to the sales of aircraft which is a wildly erratic sector because of the inherent ‘chunkiness’ of its order book. Take away the 27.6% increase in aircraft sales and the overall increase of 2.7% in January turns into a 3.6% drop. The year on year numbers are still quite strong: we are about 9.0% up in the last twelve months, but there are now signs that the initial post recession surge in capital goods sales is now giving way to a less robust trend. All of which is entirely normal, but which suggests that the economy has not much room for more above trend growth. By which I mean that the recovery, which looks as if it is producing GDP growth above the 3.0% trend line at the moment, is more likely to settle back than accelerate further. Again, this is normal, but we needed a much longer period of above trend growth to get unemployment down quickly. The durable goods data does not support the view of strong GDP growth continuing much beyond 2011.

Jobs

  • Today’s weekly report on new claims for unemployment assistance, tell us very little. Claims dropped to 391,000, which is 22,000 down from last week, but may still be unreliable because of weather and holiday reporting problems. That we are below 400,000 is a good sign. That we remain a way off the 350,00o upper boundary threshold used, as a rule of thumb, to designate a healthy job market is disappointing this far into a recovery. The numbers of people getting some form of unemployment benefit fell by over 89,000 last week, but this is an ambiguous figure. It might mean improvement as people no longer need aid. It might equally mean that people have simply exhausted their aid and are now exposed to the harsh realities of survival without it. My guess is that both factors are at play. The economy is adding a very low 83,000 jobs a month at the moment, which is way short of the numbers needed just to stay even with workforce growth. There is no need to keep repeating: our job generation record is just awful at the moment. There are signs of life and by mid-year things should be better, but I doubt we will reach the levels of growth needed to get us back to normal levels of unemployment any time soon.

One Last Thing:

I attended a Foreign Policy Association dinner last night and heard comments from a variety of what appear to be well entrenched establishment folks. All well meaning no doubt. The most interesting came from a leading figure from Singapore. He runs a huge sovereign investment fund and so pays a great deal of attention to the US economy, both short and long term. He saw good GDP growth this year and then some risks on the horizon. Amongst them he identified the risk of the US becoming less open. By which he meant less amenable to immigration which he sees as a demographic strength of the US and as a source of talent to drive the economy forward. He also expressed concern over our decaying infrastructure and the cost needed to catch up with worldwide standards of investment. Such a catch up will require funds to be diverted from other uses, one of which, health care, he also identified as a long term risk to growth. Lastly he also warned us about the state of our education system which is becoming enormously bifurcated. The best of our system is world class. The rest is well below average. Since it is the average education that forms the basis of the economy by providing the necessary talents in the workforce for us to compete, he sees our system as a net liability and not an asset.

This is an interesting point and slips over into the debate over health care as well. Americans are justifiably proud of their world class institutions, and their performance, in both academia and health care. They always refer to the outstanding results in those places as somehow justifying the entire system. But it doesn’t. The most important results are those the average American experiences. That is where the bulk of the population lives, and that is where the country falls short. Increasingly so. It is all well and good that a rich person can get world class health care and ensure a great education for their family. But if the rest of the nation cannot match that ability, the system is not doing its job. When judged by the average, and not simply the best, America is losing ground in both health care and education despite outspending everyone else by large amounts. In other words we waste a lot of money on an underperforming system. Fixing that is, of course, not easy. And it will be wrenching because it requires us to confront the failure of what we do now. The hard part is getting that failure articulated such that Americans can accept it. Unfortunately the only acceptance so far seems to be relentless attacks on our teachers, whom, by and large, are underpaid. I have heard very clever people argue we can solve the problem in education by firing the “bad” teachers, without offering an explanation as to how we identify such teachers, and how we replace them with better and presumably more motivated ones. I fear that all the current bad mouthing will simply drive out the good teachers who are tired of carrying the burden of the systemic failure, while leave us with the less able – those who have no alternative but to teach. We will certainly drive out the good once we start cutting benefits, pensions, and salaries.

Perhaps we all ought to rethink what we are doing before we add to the system’s problems by making it difficult to attract the talent we need to teach our children.

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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.

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More Mediocre News

Ho hum. That seems to be the order of the day with respect to economic news this week. Nothing special. Sometime around last December the head of steam we appeared to have gathered over last fall dissipated, and we are left with a kind of patchy sideways feel. The general trend is still upwards, but all pretense to a strong recovery has long ago evaporated. Get used to it: this could be a long summer.

The news today fits right in this narrative.

Durable goods orders rose nicely, by 0.5% in February, but that included a strong performance in machinery and aircraft. Other kinds of products, such as autos, defense, and electronics fell. The good news is that this is the third straight month of increase, and that machinery orders increase is a positive sign that factories are retooling or expanding, which implies an expected increase in activity somewhere down the line.

The bad news is that anecdotal evidence suggests that the uptick in orders reflects export growth and inventory re-adjustment and not some surge in domestic spending. It is wrong to say that the domestic economy is still dormant or declining, but it is equally wrong to argue that the clouds have definitely lifted.

They have not.

Still, orders are up over 11% since this point last year, so there is life in at least this part of the economy.

We cannot say that for housing.

Yesterday we heard that sales of existing homes declined in February, so it cannot be a surprise that today we were told that sales of new homes also dropped – by 2.2%. This brought the annual rate of sales down to 318,000, which is the lowest ever recorded and is 13% off of last year’s run rate.

There is no way to put this other than to say, simply, that is is awful.

Real estate is in such a funk that we cannot expect it to p;lay a significant role in near or even medium term growth. Prices remain weak; sales are flat or down; foreclosures pile up; home equity figures are rotten; and construction is imploding. Nothing on that list is remotely positive.

But at least we are absorbing the lost activity. Most of the lost jobs in construction are behind us – we lost over 1.5 million in this down cycle, which is a huge part of the total number of lost jobs. Most of the lost value is also behind us, but the future is bleak for any value accretion, so the recovery will not float many of those negative equity homes back into the black. This means there will be a steady trickle of foreclosures, debt write-offs, and other adjustments for months and years to come. This long tail of re-balancing will act as a drag the economy, much like an anchor. The lost value and outright lost equity will combine to dampen spending for years. As consumers adjust their habits and save in other ways rather than through real estate price inflation, that shift towards thrift will accentuate the drag. While thriftiness is usually not a bad thing, at present it is as close to being terrible as it is possible to be.

This negative impact of thrift is a classic example of market failure. It destroys the argument that markets are capable of self-adjustment, at least within socially acceptable limits. Hopefully none us us will fall prey to the, now debunked, notion that a deregulated economy is better at allocating resources than a regulated one.

But that’s another story.

Right now we are being subjected to a steady trickle of truly mediocre news.

I suppose that’s a better situation than the one we were in a few quarters back, but it makes the road ahead look both long and tedious.

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