Implications: Don't get too excited about the big headline 4% gain in new orders for durable goods in March; the underlying details of the report were tepid, signaling that the economy is still a Plow Horse. Although the increase in orders for durables was much stronger than the 0.6% the consensus expected, the gain was all due to the very volatile transportation sector. Orders excluding transportation declined 0.2% in March and have dropped for six consecutive months. However, we think much of the recent decline is directly and indirectly due to the huge drop in energy prices and the resulting drop in drilling activity. But, now that energy prices have stopped falling, orders for durables outside the transportation sector should soon start moving up again. In the meantime, we don't have to fear the onset of a recession. These orders fell for five straight months back in 2012, yet real GDP accelerated in 2012 from 2011. The other piece of soft news in today's report was that "core" shipments, which exclude defense and aircraft, declined 0.4% in March. "Core" shipments were down at a 2.2% annual rate in Q1 versus the Q4 average and it looks like the equipment component of real GDP declined at about a 5% annual rate in Q1. Plugging these data into our models for overall real GDP keeps our forecast for Q1 at a 0.7% annual rate versus a consensus expected growth rate of 1.0%. Moving forward, we expect to see a rebound in orders and shipments as temporary headwinds recede. Consumer purchasing power is growing with more jobs and higher incomes, while debt ratios remain very low, leaving room for an upswing in big-ticket spending. Meanwhile, profit margins are high, corporate balance sheets are loaded with cash, and capacity utilization is near long-term norms, leaving more room (and need) for business investment.
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Posted on Friday, April 24, 2015 @ 10:29 AM
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