December 24, 2003

Not Good News for Investment

Durables orders hit a rough spot:

Durables Orders Plunge Unexpectedly ( New orders for long-lasting U.S. manufactured goods plunged unexpectedly in November, falling at the steepest rate in more than a year across a broad range of categories, a government report said on Wednesday. The Commerce Department said orders fell 3.1 percent to a seasonally adjusted $180.07 billion -- defying Wall Street economists' expectations for a 0.8 percent rise. It was the biggest monthly orders decline since a 6 percent tumble in September 2002 and followed a revised 4 percent increase in October.

Every single category of durable goods suffered weaker demand in November, with orders for everything from computers and aircraft to new cars and defense goods falling. The category the Commerce Department calls non-defense capital goods excluding aircraft orders, which is seen as a proxy for business spending plans, fell 5.9 percent to a seasonally adjusted $55.59 billion. It was the biggest decline in this segment in more than 1-1/2 years since a 7.8 percent fall in March 2002...

I can understand producer durables falling. But consumer durables?

Posted by DeLong at December 24, 2003 06:23 AM | TrackBack


The optimistic folks at say not to worry:

"The pause in durable orders growth in November should not be viewed with alarm since durable goods orders tend to be volatile, and one month does not make a trend. The November decline follows steady growth since May. New orders are still 6.7% higher than a year ago in November."

"Despite the November pause, conditions are still on the rise for a continuing rebound in business spending. Among the factors that bode well for the new year are repaired balance sheets, access to cheap financing, the need to replace worn-out equipment, and increasing demands from investors to generate long-term profits via risk taking. It is likely, therefore, that businesses will continue to increase investment in coming quarters, which will eventually prompt increased hiring and lead to a solid economic rebound."

Posted by: Kosh on December 24, 2003 07:35 AM


I agree with Kosh (or that one month's numbers in a volatile category do not a trend make, yet some of the arguments that is citing are becoming rather threadbare (we've been hearing about replacing old equipment for 18 months or so now) and others (investors are demanding risk-taking) are rather dreamy.

Me? I think we've got a sputtering recovery, with an economy that is clearly stronger than it was a year ago but in no sense as strong as Q3 numbers made it look, and Brad's other posting about Wal-Mart's helps demonstrate why: Bush economic policies have left the bulk of american households no better off than they were when the recession started....

Posted by: howard on December 24, 2003 08:42 AM


Just to clarify, I DON'T agree with the assessment. It's true that one month does not a trend make, but I don't see consumer balance sheets becoming healther. Both debt/income ratios and bankrupcies have been increasing, not decreasing. Consumer spending (fueled by borrowing) prevented that recession from being as bad as it might have been otherwise, but now consumers are tapped out. With little real improvement in jobs or income it's hard to see how this recovery can really be sustainable.

Posted by: Kosh on December 24, 2003 09:07 AM


The Commerce Department reported yesterday that personal income rose 0.5% in November, which I believe was its fastest pace in a year and a half or so.

Posted by: James Surowiecki on December 24, 2003 09:50 AM


The increase in personal income is encouraging, but again, one month does not a trend make. Now how are we doing on the bankrupcy stats and debt to income ratios? It's the consumer debt that really scares me, particularly if interest rates start to creep up.

Posted by: Kosh on December 24, 2003 11:20 AM


I agree with Kosh that the news is the part that it new. True, capital goods orders are above year-ago levels, but we knew that confidently at 8:29. What is new is that they are less far above year-ago than we thought.

I also agree with Kosh on the consumer debt situation, but with two caveats. First, my friend, do not trouble yourself with the LEVEL of consumer debt. It naturally tends to rise over time, in real terms and as a ratio to nominal income. Worry instead about the disproportionate share of the FLOW of consumer demand financed by fresh borrowing, current or recent.

Second, if you think that higher bond yields will derail the expansion, then don't expect them. True, the bond market can have a mind of its own, but only for about six weeks. Bond traders are stupid but not dumb, and that have pretty reliable incentives to be stabilizing speculators. So don't worry (too much) about the economy. Instead, enjoy the Saturnalia, even if it has been appropriated by Christians -- or, as we say these days, JudaeoChristians.

Posted by: Gerard MacDonell on December 24, 2003 01:21 PM


James, i'm inclined to think (without having examined the matter closely) that there are some odd factors at work with the personal income; there are just too many reports of how basic wage-earners (non-supervisory personnel) haven't seen any income growth over the past 12 months.

Gerard, i don't quite follow your argument about higher bond prices. I expect higher bond prices in general, but i especially expect them if and when Asian bankers decide that the strategy of buying US government paper as an export subsidy has run its course.

Regardless of whether that happens, i do expect higher bond prices, as i say, and i expect that to have negative implications for growth (whether it will "derail" the recovery is harder to say). What am i missing?

Posted by: howard on December 24, 2003 01:32 PM


Howard, the BLS says average weekly earnings for production/nonsupervisory workers were up 2.4% in the last twelve months:, while average hourly earnings were up 2.3%:, at a time when inflation is around 1.5%.

Posted by: James Surowiecki on December 24, 2003 03:31 PM


Officially, the inflation rate is 1.5% but in reality it's a lot higher than that. It's about time that some more realistic metrics of inflation were made preponderant. I live in New York City and I know my energy bills, rent, food, insurance, and entertainment costs have been going up at about 5 times the official inflation rate. The only things I pay less for are DVD players, computers and the like. But that never was a big part of my budget, anyways. 1.5%? Yeah, right! Cooking the books more like it.

Posted by: Jacques Engelstein on December 24, 2003 05:21 PM


People have just about finished refinancing their houses, taking out some capital and redoing the kitchen. Just about anyone who could afford a new car or refrigerator or whatever bought one at 0% forever and has no money left for new payments (you still do have to pay the principal). How much room is left for new stuff? It is not surprising that consumer durables are down. The real question is how much demand is left.

Posted by: Josh Halpern on December 25, 2003 01:46 PM


On Brads questions about durable orders.
Detailed data not yet reproted, but the weakness in consumer durables may be autos.
In autos, and some other sectors, the orders numbers are actually shipment numbers. So if
auto shipments in Nov were down it would show
up as a drop in consumer durables orders falling.

Actually, they do not collect any orders data.
They collect data on shipments, backlogs and inventories and the data that is reported for orders are actually backed out of this data.
Generally, at least as far as the stock market is concerned the best data to watch in the S-I-O
report is the backlogs data.

With employment starting to rise, nominal personal income has also bottomed. Interestingly, nominal personal income growth is one of the best leading indicators of bond yields and the stock market PE. Nominal personal income growth is also a leading indicator of inflation. On the other hand, profits growth leads income growth. The data is also starting to show growth in aggregrate real wage and salary income for the first time in this cycle. I personally am watching nominal income growth as the best variable to judge the risk of a deflation scenario.

Posted by: SPENCER on December 26, 2003 07:39 AM


James, thanks - i'm going to have to dig into this a little more, since i'm sure i've seen contrary data. Even the data you cite isn't really consistent with .5% growth in one month alone, so that piece of data is still curious to me....

Posted by: howard on December 26, 2003 08:16 AM


What is not getting any attention is point that with real GDP growth slowing sharply from last 2 quarters rate and employment bottoming is that it implies we are seeing an extremely sharp slow down in productivity growth.

Howard: 0.5 income growth for one month is high, but not out of line. They also revised last months data to show stronger income growth.
It is the strongest monthly increase in probably 2-3 years.

Posted by: spencer on December 26, 2003 08:24 AM


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