Durable Goods Orders for August Beat Expectations
Interpreting the durable goods orders numbers is always a bit tricky, and this month is no exception. Volatility, especially in aircraft orders, really complicates the interpretation. The headline number showed orders declining 1.3% in August, slightly better than the most recent consensus of negative 1.4% but off from last month's positive 0.7%. Excluding the transportation orders (non-civilian aircraft orders plunged 40%, killing the overall number) durable goods orders were up an impressive 2%.
When pulling apart the individual categories, there was no single category that showed down orders. In fact, non-transportation order growth accelerated in every category except one between July and August. This squares with the positive comments from manufacturing executives and last week's very positive report from Emerson Electric (EMR), a major manufacturer of capital goods. Emerson noted acceleration in orders in most categories and in the overall order situation for the three-month period ending in August. Keep in mind that my discussion of orders pertains primarily to August and that the potentially difficult purchasing manager numbers that I allude to above are for September.
Nondefense capital goods orders, an excellent measure of businesses' capital spending plans, were up an impressive 4.1% after last month's scary 5.3% decline. Capital goods shipments were also up nicely this month, which is a direct input into the fixed investment category of the GDP report.
Market's Fixation on Manufacturing Is Misplaced--Watch the Consumer Instead
I think the current preoccupation with manufacturing is a bit overdone. Yes, manufacturing moved relatively early in this cycle. Yes, it greatly amplified some relatively modest gains in consumer spending. But manufacturing could not have moved without the consumer moving first. Manufacturers don't suddenly decide to make more stuff on a whim. It takes demand from consumers to get manufacturers going again. Improving consumer sentiment and improving inflation adjusted incomes will drive that consumer. That is why I'll be watching hours worked, real hourly wages, and employment levels in the months ahead as key determinants for the direction of the economy.
We Won't Have to Wait Long to See if the Consumer Is in Better Shape
This week brings a ton of data on the consumer, and the following week's employment report will bring a lot more important numbers to the table. On Oct. 1 we'll get personal income figures (the wherewithal for consumer spending), the personal consumption price index (which shows exactly how far those dollars went), and personal spending (how much of those inflation-adjusted dollars consumers parted with).
These data are from August, and past employment reports and retail sales reports suggest decent but not spectacular numbers. The consensus for personal income is 0.2% following a 0.2% gain the previous month, which strikes me as potentially a little light given dividend increases and resumption of extended unemployment benefits. The inflation figure is estimated at a mere 0.1%, which also seems a little low given the 0.3% increase in the Consumer Price Index for the same period (the CPI has a substantially greater weight on housing-related products, and those have been depressed). On the other hand, the anticipated 0.3% increase in consumer spending seems relatively consistent with recent retail sales reports.
Purchasing Managers Report Has the Market on Edge
As I have foreshadowed above, I am anticipating a disappointing ISM national Purchasing Managers Report based on last week's European report and relatively sloppy US regional reports. The market anticipates a decline from 56.3 last month to 55 this month. A bigger drop would not surprise me or change my outlook.
Case-Shiller Home Price Index Due for a Decline
After several months of increases, I think the Case-Shiller home price index is finally likely to show a small decline. Recall that this is the data set for the three-month period ending way back in July. This will be the first time the series will not include a month directly affected by the housing credit that expired in April. Other pricing data sets that are not moving averages have already shown some small declines. The Federal Housing Finance Agency number showed a 0.5% decline in July, its second decline in a row. Again, small price declines will not change my overall outlook.
