July 27, 2003

More Good Business-Cycle News

Well. It's starting to look good--as if we may finally get a healthy recovery, in production at least:

Forbes.com: WRAPUP 2-U.S. June factory orders, new-home sales up: WASHINGTON (Reuters) - Orders for costly U.S. manufactured goods shot up in June at the fastest rate in five months while sales of new homes hit a record, reports showed Friday, boosting optimism the recovery is gaining speed. The surprisingly strong signs of economic revival gave investors a jolt of energy that sent stock prices higher, but some analysts cautioned it will take some time to gauge whether a quicker economic pace has taken hold. A housing industry group suggested the recent uptick in long-term interest rates may be casting some gloom on the hot sector. In addition, economists noted the durable goods report is often volatile and subject to sharp revision, especially with many factories shutting down for retooling in July. The Commerce Department said orders for durable goods -- items like cars and refrigerators designed to last three years or more -- climbed 2.1 percent to a seasonally adjusted $172.5 billion last month after being flat in May...

Posted by DeLong at July 27, 2003 10:31 AM | TrackBack

Comments

"The Commerce Department said orders for durable goods -- items like cars and refrigerators designed to last three years or more -- climbed 2.1 percent to a seasonally adjusted $172.5 billion last month after being flat in May..."

The problem being, I suppose, that cars and white goods are being bought on credit -- usually, 'buy now, pay next year at 0%' -- rather than with cash. Now, I'm not an economist, but doesn't this mean that while goods are being bought (and the factories keep producing), the money supply isn't boosted until the payments kick in? (Notwithstanding the social problems of mounting consumer debt in the USA.)

Anyway, I'd be glad of a primer, at least, on the different economic effects of a rise in consumer spending based primarily on long-term, low-interest credit as opposed to paying cash or sticking the cost on a credit card...

Posted by: nick sweeney on July 27, 2003 01:54 PM

IIRC the headline number was dominated by aircraft production, not necessarily a reproducible result.

Posted by: RonK, Seattle on July 27, 2003 04:13 PM

whoop-fucking-pee. where's my job?

Posted by: davebanjo on July 27, 2003 06:16 PM

>>Now, I'm not an economist, but doesn't this mean that while goods are being bought (and the factories keep producing), the money supply isn't boosted until the payments kick in?

Nah. In order to finance the sale, the vendor borrows the money from the bank, and the loan created is part of the money supply.

Posted by: dsquared on July 28, 2003 05:00 AM

What worries me is interest rates going up. Vacancy rates at apartments in my area are at very high levels, but the building keeps going on and on. The low interest rates have made a higher vacancy rate tolerable. My guess is that everyone is building now while rates are low and overbuilding will result. As soon as interest rates rise appreciably, the new starts will collapse. All these units need durable goods, but that is not sustainable either.

Posted by: bakho on July 28, 2003 03:00 PM

As the story itself notes, durable goods orders are notoriously volatile, and equally notoriously subject to revision. When I was on the economics beat, it was one of the indicators I trusted least. Transportation orders (Boeing) are PARTICULARLY volatile month-to-month, and they accounted for the bulk of the June pop.

Given what bond yields and mortgage rates are doing, new home sales would hardly seem to qualify as a leading indicator at this point.

Bottom line: Between the refi boom and the housing boom, we've been borrowing growth from the future at a prodigious pace over the past year. If the recovery DOES hit its stride, and yield/rates keep rising, we've going to have to pay that borrowed growth back.

In other words, this is likely to be a self-limiting boomlet.

Fundamental problem: too much capacity, too much consumer debt still left over from the big party.


Posted by: Billmon on July 28, 2003 08:01 PM
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