New orders for durables goods, considered a leading indicator for the business cycle, slipped 0.1% last month on a seasonally adjusted basis. The slight decline follows a strong 4.1% jump in July. Given all the recent worries about rising recession risk, it’s a wonder that new orders didn’t fall further. The fact that this critical measure of economic activity managed to hold on to virtually all of July’s gains implies that the economy may continue to struggle but it will avoid a recession. That relatively optimistic view is strengthened after learning of the 1.1% rise last month in business investment (a proxy for capital spending, as measured by nondefense capital goods orders excluding aircraft).
You can’t tell much from looking at monthly data, given all the short-term noise. A better measure is comparing rolling 12-month percentage changes. By that standard, news orders for durable goods and capital spending continue to rise at strong rates, as you can see from the chart below.
It’s true that the annual rates of change have been slipping for most of the past year, but that’s not ominous on its face. The former 10%-to-20% year-over-year increases were always destined to slow. Those rates were a byproduct of the bounce-back effect of an economy that suffered a massive shock. But the pace wasn’t sustainable. The question, of course, is how much more will the pace decelerate?
For the moment, there’s no immediate warning sign in the annual trend. Durable goods orders continue to advance at a healthy clip vs. the year-earlier period. The key problem is that employment isn’t delivering a comparable rebound, as indicated by the weak recovery in private nonfarm payrolls. The labor market’s sluggish response is hard to see in the chart above so let’s review payrolls alone on a rolling 12-month basis:
Weak job growth remains the primary threat for the macro outlook. Spending on durable goods, by contrast, continues to rise at a healthy clip on a year-over-year basis. But let’s not ignore the potential for trouble. As the rate of growth for durable goods orders slows, as it likely will, the danger for the economy rises without stronger job growth. Indeed, it’s no surprise to see that new orders slumped in the early stages of the Great Recession, as the first chart above shows. The good news these days is that new orders are still growing at rates well above what might be considered a danger level. But for how long?
“Large companies are so cash-rich that they can keep spending despite lower confidence,” says Ian Shepherdson, chief U.S. economist at High Frequency Economics, via Bloomberg. “In competitive industries, the company which does not spend loses market share.”
The 1.1% rise last month in capital spending “shows that we’re not falling off a cliff, which helps,” Wayne Kaufman, chief market analyst at John Thomas Financial, tells Reuters. “This is a sigh of relief, and slightly reassuring in the short-term.”
For now, it looks like we dodged another statistical bullet.