The Durable Goods Report for April 2011 was released this morning and the volatile indicator was bad.
New orders for manufactured durable goods in April decreased $7.1 billion or 3.6 percent to $189.9 billion, the U.S. Census Bureau announced today. This decrease, down two of the last three months, followed a 4.4 percent March increase. Excluding transportation, new orders decreased 1.5 percent. Excluding defense, new orders decreased 3.6 percent.
The durable goods report is considered an important leading economic indicator because of the clues it provides about future industrial production. However, as mentioned above, the indicator is volatile and fluctuates month-to-month. The trend of the indicator becomes more important. With 2 of the last 3 months showing declines in new orders are we seeing a new negative trend in this indicator?
We are not recession calling; we are not in the prediction business. When the data changes we’ll change our mind but what we’re continuing to see is softening economic data and it has lead us to take a short-term tactical reduction in equity exposure.
One other key aspect to the durable goods report is the non-defense capital goods orders excluding aircraft. This is a measure of business capital spending and a proxy for business confidence levels. This line item is also critical to understanding the nation’s productivity levels. A strong economy will see growth in this line item. We do not see growth in capital spending in the April 2011 report. There was a drop off from the increase in March but there still was an increase year-over-year consistent with our view of a slowly healing economy that is facing some short-term headwinds.
Subdued capital spending numbers will also keep core inflation expectations down which is a benefit to bond investors.
Persistently strong durable good orders bode well for economically sensitive sectors like basic materials, technology, and financials. Weak durable good numbers lead the defensive sectors; utilities, health care, and consumer staples to outperform.
Click image to enlarge. Chart courtesy of Stockcharts.com.
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