August 26, 2003

More Good Business Cycle News

Good news this morning about spending on durables:

New orders for durable goods in July were $174 billion, up 1.0% from June. Shipments were $181.4 billion, up 2.6% from June. And inventories were $263.9 billion, down 0.9% from last month...

Posted by DeLong at August 26, 2003 07:34 AM | TrackBack


Recently, Brad noted that real spending on technology is running at a record pace. Today's durable goods report shows that even in nominal terms, orders for core (non-military, non-aircraft) capital goods is not too shabby, running at a 10% annualized pace over the past 3 months. The (apparently unplanned) slide in inventories left the inventory/shipment ratio for durables at 1.45-to-1, matching the all-time low. Given that orders have gone three months without falling, that tight inventory ratio seems likely to lead to a faster pace of production. Recent concerns that military spending is driving growth should be calmed - orders were up strongly despite a 12.2% drop in defense capital goods orders.

Now, who's going to be first to say none of this matters 'cause employment isn't growing?

Posted by: K Harris on August 26, 2003 09:44 AM

There is no question a GDP growth speed up is occurring this quarter. The only questions are whether it can be sustained, and what this bodes for employment.

Curiously, Intel officers have been warning that they do not find evidence of an industry-wide upturn in semiconductor demand.

Posted by: anne on August 26, 2003 10:04 AM

The markets don't seem that impressed though. Stocks down, bonds up. And new home sale dropped.

Posted by: Mats on August 26, 2003 10:08 AM

Stephen Roach

As a card-carrying growth skeptic, even I concede that bouts of temporary acceleration are possible. Just such a rebound now appears to be under way. Financial markets are now discounting such an outcome, and we have made a modest upward adjustment to our baseline forecast to reflect this apparent quickening. But as investors now look beyond this cyclical rebound, there are two alternatives to consider -- a full-blown synchronous recovery in the world economy or yet another in a long string of relapses. In my view, the case for a relapse remains the more compelling of the two options. The precarious post-bubble state of the world’s growth engine, the lack of global demand linkages, and serious cross-border imbalances all speak of a lingering vulnerability that reflationary policies have not resolved....

Posted by: anne on August 26, 2003 10:29 AM

you don't need to be as pessimistic as Roach (who has been right a lot more than he has wrong these last five years) to think that an "acceleration" to GDP growth that approzimately mirrors productivity growth plus workforce growth isn't going to create a single job.

certainly productivity growth ceteris paribus is a Good Thing. however, unless you are an employer, a stagnant job market with needlessly high unemployment is a Bad Thing. sure, things could be worse, but things could be better.

Posted by: wcw on August 26, 2003 11:31 AM

August 26, 2003

Fox News dropped its lawsuit against Al Franken, shortly after a federal judge refused to block the liberal humorist from using the Fox slogan ``Fair and Balanced'' on the cover of his book.

The lawsuit had sought unspecified damages from Franken and Penguin Group, publisher of ``Lies and the Lying Liars Who Tell Them: A Fair and Balanced Look at the Right.''

``It's time to return Al Franken to the obscurity that he's normally accustomed to,'' Fox News spokeswoman Irena Steffen said.


Posted by: Fair and Balanced on August 26, 2003 12:29 PM

Mats writes:
> And new home sale dropped.

Well, maybe. If you look at the actual press release, you'll find that the 2.9% decrease was actually 2.9% plus or minus 10.5%. (These are census estimates which are apparently pretty noisy.) In other words, odds are that sales decreased, but that's about the strongest statement you could make.

Posted by: Jonathan King on August 26, 2003 12:38 PM

K Harris writes:

> Now, who's going to be first to say none of this matters
> 'cause employment isn't growing?

I don't know, but I took a look at the Commerce report and I noticed that the durable goods time series looks like a case where the seasonal adjustment is absolutely ferocious.

Adjusted data for New Orders (in millions)

July03 173,979
June03 172,318

Unadjusted data:

July03 150,222
June03 183,172
July02 151,916

Obviously, you want to use adjusted numbers to make month-to-month comparisons, but the June/July adjustment is so large that I'm not sure (since I'm not an economist) how seriously to take a $1.7 billion change when the seasonal adjustment to July alone was +$23.7 billion. And the July year-over-year change is still around -1%.

So the number they put out isn't bad news, clearly, but the year over year numbers aren't that exciting. Actually, durable goods orders ex-defense for all of 2003 are down 1.2% versus 2002 compared to a basically flat line overall if defense goods are included.

By all means, everybody, let me know where or if I've screwed up here.

Posted by: Jonathan King on August 26, 2003 01:25 PM

Mats and Jonathan,

Putting quibbles over the quality of data aside (what"s 21% among friends?), the drop in new home sales in July left (reported) sales at the second strongest level in history. In fact, May was the third strongest month for new home sales on record. That's a string of three in a row. There is nothing about home sales lately that can be construed as weak. I doubt whether another month like the last three can be arranged, but even then, we need to be careful about what we consider weak. By the way, building permits, the part of the July housing starts report that offered any hint of a pullback in August - they were revised upward. Single family permits were at the...ready?...strongest level on record.

And at the close, stocks up, bonds up.

Posted by: K Harris on August 26, 2003 01:45 PM

K Harris, my back-of-the-envelope math works out the stock market rise at %0.25, or a quarter of a point. Are you sure you want to hang a "nyah, nyah" on that?

Posted by: armchairEconomist on August 26, 2003 02:01 PM

K Harris, my back-of-the-envelope math works out the stock market rise at %0.25, or a quarter of a point. Are you sure you want to hang a "nyah, nyah" on that?

Posted by: armchairEconomist on August 26, 2003 02:03 PM

K Harris writes:
> Putting quibbles over the quality of data aside (what"s 21%
> among friends?), the drop in new home sales in July left
> (reported) sales at the second strongest level in history.

Actually, I was trying to argue that the data were so poor that I wasn't going to get myself worked up about them on a month to month basis. It's also easy to see that housing is the happy story of the year. July 2003 sales are 21.2% (+/- 13.3%) higher than July 2002, and the year to date is up 13.3% (+/- 4.9%) Of course housing is up; mortgage rates are doing some kind of 50s revival thing. We all know it can't go on forever, of course, but July wan't a month when the market fell of the table or anything.

Posted by: Jonathan King on August 26, 2003 02:06 PM

It's still bonds up then. Yet there is a huge supply coming (see below). Market for gov't bonds does not seem to expect the output gap to close or FED to rapidly hike anytime soon. It might still be wrong of course.

From NYT-online today:
Budget Office Says 10 Years of Deficits Could Total $5 Trillion
The new 10-year projections are based primarily on the cost of three programs that President Bush and the Republican majority in Congress broadly support

Posted by: Mats on August 26, 2003 02:11 PM


Hello again. We must have crossed in the mail. OK, the point that I would make is not that durable goods orders are strong vs year ago. Or two years ago. (Then again, I might - see below.) What we are looking for is an acceleration in factory activity, since factory activity has been in the ditch. Taking the seasonally adjusted data at face value (which you must do, for at least part of the analysis), what you see is that core capital goods orders (leaving out defense and aircraft) have risen for 3 months in a row. Overall durable goods orders have risen for two months running and have avoided falling for 3. In a period in which you are waiting for the factory sector to stop dragging down the rest or the economy, this is very encouraging.

Now, one reason that the seasonal factor adds so much to the overall July durables data is that the yearly auto plant shutdown typically happens in July and August. That's a bit in each month, with no hard rule about when it starts or ends. So you don't know jack about autos from the durable goods data in July and August. June and September are kind of tricky, too, because all sorts of inventory clearing, then building, are underway. I point this out to help build your confidence in the ... no, that's not right. Oh... this is the other half of the analysis, where it is ok to look behind the seasonal adjustments and have some doubts. My doubts are somewhat reduced by the fact that non-transport orders (which avoid that summer shutdown problem) were up 1.7% in July, both on the month and from a year ago. In fact, non-transport orders have risen at least 1% a month for the past 3 months. That looks like the acceleration in factory activity we want. If you were to look at a chart of non-transport orders, you would see that July orders were above the average for all of 2002, and just slightly above the average for 2001 (not enough to avoid being revised away, but better than being lower than in 2001).

Posted by: K Harris on August 26, 2003 02:13 PM


Why not? All in good fun, I hope. By the way, its 0.24%.

If there was a -- how you say?-- nyah nyah, it had to do with expecting to learn something about maket participants thinking, on a given day, from changes in market prices. The whole theme today in stocks and bonds was that nothing seemed to have the remotest relationship to the economic data. Apparently, a hedge fund spilled roughly $2 bln from stocks into Treasuries, coaxing some other accounts to follow along. That sort of thing can really change prices, and needn't have anything to do with the day's economic data.

There is a tendency to try to explain short term price movements in financial market with reference to recent news. (And we may not agree on which news matters.) Reliance on efficient markets thinking would lead one in that direction. An awful lot of portfolio decision are made in meetings, where ideas come into the room in the head's of members of an investment committee, get worked out among the participants. Trades flow out of those portfolio decisions. The economic data and events of the day can be a side show, unrelated to those portfolio decisions. If today's data told us anything, it is that the economy is in better shape than we thought yesterday. Maybe a great deal better. If market prices don't reflect that, there is no particular reason to think that changes in market prices today reflect only today's news, or only the news we are considering.

Posted by: K Harris on August 26, 2003 02:43 PM
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