New orders for durable goods, a widely monitored leading economic indicator, rose 4.0% in July on a seasonally adjusted basis, the U.S. Census Bureau reports. That’s the highest monthly gain since March, although the increase is somewhat tainted because a big chunk of the advance came from a surge in aircraft orders. Excluding transportation, durable goods orders rose by a milder 0.7%. Even so, the gain suggests that while the economy continues to struggle, the risk of an imminent recession remains a low-probability event.
Low, but not zero. It’s debatable just how low is low. In any case, one indicator is hardly the last word on the state of the business cycle. But if you’re trying to make a case for a darker outlook, today’s durable goods report offers a mixed bag. The main threat in the numbers resides with the business-spending component of durable goods (non-defense capital goods ex-aircraft), which slumped in July by a hefty 1.5%–the first drop since April and the biggest monthly setback since January’s 4% dive. The implication: sentiment in the business community is deteriorating again.
“It’s going to take time before businesses become comfortable about investing and hiring,” Ryan Sweet, senior economist at Moody’s Analytics, tells Bloomberg. “The improvement in July [for durable goods] appears to be narrowly based.”
There may not be a lot to celebrate in today’s durable goods report, but is it a sign that the economy is set to dive? Not necessarily, as Rudy Narvas, senior economist at Societe Generale, explains via Reuters:
It was much better than expected across the board and with the upward revisions you can see upward revisions to Q2 GDP when that report comes out later on this week. When you look at the hard data that has been coming out the past couple of weeks it has been much better than the sentiment surveys that we have been seeing, so there has been a contrast in data between these manufacturing sentiment surveys and the consumer confidence and the hard data. The hard data seems to be holding up pretty well. Whether or not one catches up to the other in subsequent months has yet to be seen.
The case for thinking optimistically, if only marginally so, can also find support by looking beyond the short-term noise with several economic indicators, including today’s updated durable goods numbers. As the chart below shows, the year-over-year changes for new manufacturing orders (red line) and even business spending (black line) are still well above the levels typically associated with recessions.
In short, there’s still a good case for thinking that the economy will steer clear of a new recession, if only slightly. That’s not saying much, given that the distinction between growth and recession may be increasingly thin. But for the moment, that’s all we’ve got. There’s not much of a case for arguing that economic growth is set to roar, but forecasting a new downturn isn’t compelling either. We’re still stuck in the land of modest growth. Yes, that means the broad trend remains vulnerable. But it’s been vulnerable all along and we’re still standing, or at least wobbling forward.