January may have been harsh on the labor market and other sectors of the economy, but there’s no sign of a winter chill in today’s durable goods report for last month. New orders for manufactured durable goods surged 2.7% on a seasonally adjusted basis in January, the highest monthly gain since last September. But the robust advance in the top-line number for new orders comes with some messy details.
A large gain for transportation equipment last month (+27.6%) was a key source of the rise. Excluding this volatile transport sector leaves new orders off by 3.6%. Even worse, new orders for capital goods excluding defense and aircraft tumbled nearly 7%. Demand for these products, such as computers, is closely watched as a leading indicator of future economic activity. As economist Bernard Baumohl of The Economic Outlook Group explains in his book The Secrets of Economic Indicators,
Orders for civilian aircraft occur in periodic bursts and are hugely expensive. When a large order is received, it swells the total value of new orders for a brief period, greatly exaggerating the underlying pace of demand for durable goods, only to plummet the next month when it returns to a more normal level. To eliminate these erratic movements, it’s better to study the behavior of durable goods orders without transportation.
Baumohl also notes,
Companies are less likely to spend on new capital equipment and goods if they suspect a business slowdown is looming.
For the past year, those suspicions were minimized, as the recent trend for non-defense capital goods ex-aircraft shows.
Is January’s retreat in this indicator worrisome? Not necessarily, according to a report from Bloomberg today:
Over the past three years, these orders [non-defense capital goods excluding aircraft] have dropped in the first month of a quarter every time except once.
“It’s entirely seasonal factors,” Jim O’Sullivan, global chief economist at MF Global Inc. in New York, said before the report. “There’s been a pretty consistent pattern. If anything, manufacturing growth has accelerated recently.”
But with the Libya crisis running oil prices above $100 a barrel, concerns are mounting about the viability of the economic recovery. “If you go above $120 on a sustainable basis, you will have a meaningful shortfall in global growth relative to what the current consensus expects,” warns Jonathan Garner, Morgan Stanley’s chief Asia and emerging-market strategist.
Fatih Birol, chief economist for the International Energy Agency, advises that “oil prices are a serious risk for the global economic recovery. The global economic recovery is very fragile – especially in OECD countries [the major industrialized economies of the world.”
David Kotok, chairman and chief investment officer at Cumberland Advisors, cuts right to the chase and writes in a note to clients today that “the risk of recession in the US and European economies is rising daily.”
To be fair, all the oil worries could blow over just as quick as they arose. But no one really knows where the Libya crisis is headed. Welcome to the latest edition of an unknown unknown. The bottom line: it’s all about oil for the moment… again.