MacroScope

Economic recovery may not be a durable good

February 28, 2012

Ouch. That was the general sentiment after this morning’s strikingly weak durable goods report for January, which suggested the Federal Reserve was right to flag slowing business investment as a worry in its January statement.

Chris Williamson, chief economist at Markit, wonders if this is the start of a trend:

The big question is whether the downturn in January is merely a statistical wobble in what we must remember is a very volatile data series, or whether demand for U.S. goods really slumped at the start of 2012. Reassuringly, other data sources such as business surveys suggest that demand has remained fairly resilient, and it seems unlikely that the disappointing performance will be replicated in coming months. However, these order book numbers remind us exactly why many policymakers are extremely cautious about the underlying strength of the US economy and that the recovery looks set to be a bumpy ride over the coming year.

For a more sobering perspective, Neil Dutta at Bank of America-Merrill Lynch pointed to a troubling pattern in a subcomponent of the report that is used as a proxy for investment spending:

To draw GDP implications, economists look at the core capital goods numbers, formally called nondefense capital goods ex aircraft. Core capital goods orders cratered 4.5% while shipments dropped 3.1%. Over the last three months, core orders and shipments are running at -10.3% and -4.8%, respectively, which is decidedly negative.

Still, Eric Green at TD Securities offered a note of optimism:

The weaker orders numbers reflect a drawdown in inventories that most, including ourselves, are already expecting in Q1. It is also consistent with the weaker export driven demand we anticipate over much of this year owing to more sluggish global growth. Despite this the economy should still growth north of 2.0% this year.

 

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