In case you did not read this past weekend’s missive there were two charts from last week’s economic data that are worth bringing to your attention – Durable Goods and New Home Sales.
A Word About Durable Goods Orders
Friday was the release of July’s durable goods orders. In a word it was an “unmitigated disaster.” Okay, that’s two words, but you get the idea. Let me give you the headline release first from Econoday:
“A second month of large aircraft orders fed a second month of large gains for total durable goods orders which jumped 4.2 percent in July on top of a 1.6 percent jump in June.”
The problem with the report is that it was based on new orders for airplanes for commercial carriers around the globe. However, just because an order is placed does not mean that it is filled. Next month we are likely to see a large reversal in durable goods orders as Quantas airlines just cancelled orders for 35 of the 787 “Dreamliners” from Boeing.
However, as an economist, I am not really interested in what orders are being placed for commercial airlines but rather what the average consumer is buying in terms of washers, dryers, refrigerators and automobiles. Therefore, once we strip out transportation equipment we find the real economic story.
In the month of July durable goods orders, ex-transportation, declined by 0.4% following a 2.2% decline in June (previously reported as a 1.1% decline.) It actually gets worse as non-defense capital goods, excluding aircraft, imploded to a -3.4% crushing expectations that were set at a very modest -0.2%. June’s number was also revised down from -1.4% to -2.7%. One more month of data like this and we are going to start seeing sharp cuts to Q3-GDP.
The chart shows the annual change in durable goods new orders versus the annual changes in non-defense capital goods less aircraft. As you can see the current levels of negative annual growth have historically been coincident with the onset of recessions in the U.S.
One Chart On Housing
I have written many articles in the past on why housing will not recover for a very long time. (See Housing Recovery – Hope and Reality) I bring this up because this past week the media was falling all over themselves once again on some of the releases of the “seasonally adjusted” housing data showing improvement in the housing market.
First, this is the seasonally strong time of the year for the markets so we better be seeing some pick-up in activity or we have other things to be worrying about.
Second, inventory is lean as sellers have pulled houses off of the market because they cannot sell it for what they need to get out of it. Furthermore, banks are once again renegotiating loans under the HARP program as well which is further reducing inventory.
Third, investors are still snapping up homes for investment purposes currently. As soon as prices rise enough – this activity will cease very rapidly as that particular market is finite. Furthermore, if, or when, borrowing rates rise, which lowers investment returns, activity will evaporate.
But most importantly, there is a huge difference between stabilization and recovery. Does this really look like a recovery to you?
It took a full 2 point slide in mortgage interest rates, artificially induced by Federal Reserve activities, to create a small uptick in sales. Sustainable? Most likely not.
Also, notice what happens to sales during recessions? When, not if, the next recession comes this naiscent recovery will disappear.
Keeping A Clear Head
It is important to remember that the majority of the recovery that has been witnessed has been induced not by increasing aggregate end demand from consumption but rather by the artificial stimulus and interventions that have dragged forward future consumption. While a variety of programs have been successful at stabilizing various markets and the economy – the demand pull continues to leave “air pockets” in the future which in turn requires more intervention and stimulus. The problem is that these “air pockets” are becoming consistently larger and more difficult to offset and eventually will just have to be dealt with.
Focusing on the trends of the data, as well as what is driving those trends, is important in understanding the various investment risks that is undertaken within portfolios and retirement planning strategies. We have not entered a “new world” where economic and investment cycles have been permanently repealed. Unfortunately, the longer these cycles are postponed due to artificial interventions the more dramatic the cycles are likely to be.
Images: Flickr (licence attribution)
About The Author
Lance Roberts – Host of Streettalk Live
After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.
Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.
Lance’s investment strategies and knowledge have been featured on Fox 26, CNBC, Fox Business News and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, The Washington Post all the way to TheStreet.com as well as on several of the nation’s biggest financial blogs such as the Pragmatic Capitalist, Zero Hedge and Seeking Alpha.