Delving into Durables
January durable goods orders tumble 7.8 percent - Yahoo! News
New orders for U.S.-made durable goods fell by a much sharper-than-expected 7.8 percent in January as nondefense goods orders saw their biggest monthly decline ever, a government report showed on Tuesday.
A steep drop in orders for Boeing Co. (NYSE:BA - news) airliners helped push down nondefense orders for durable goods, items meant to last three years or more.Excluding volatile transportation orders, which are heavily skewed by aircraft, durable goods orders fell by 3.1 percent in January, their steepest drop since July 2005, the
Commerce Department reported. That followed a downwardly revised gain of 2.8 percent in December.Economists polled by Reuters had forecast that orders for durable goods would fall 2.5 percent, orders excluding transport would drop 0.2 percent and orders excluding defense goods would rise 0.3 percent.
Thus read the headline number, which combined with a selloff in China and a bad print or two to send the markets hazzardously close to closing below the December closing low of 12,194. But we always argue that the month-to-month volatility, compounded by seasonal adjustments that may not always make sense, provide the headline number with little value. Instead, we prefer to look at year/year changes before seasonal adjustments are made.
Our analysis has provided a useful advance read, making us more cautious when all appeared well. So what does it tell us now?
Perhaps most importantly, the orders for Durable goods are not plummeting. In fact, it is possible that they are already recovering from the bottom placed in November for orders and December for shipments.
Excluding transportation, however, orders are still declining and likely to lead shipments lower. Particularly worrying are growing inventories, which have outpaced sales and order growth for five consecutive months.
Computers rebounded from a weak December that could have been explained either by tough comparisons to Christmas 2005 or to anticipation of Windows Vista. Problem with the latter interpretation: businesses were able to get Vista in November and account for the better part of spending on computers. Furthermore, the weak January rebound doesn’t exactly look like pent-up demand.
Net result, the market probably over-reacted to the negative headline, but has plenty of catching up to do for all the underreacting it has been doing the last few months.
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Like you, I prefer year-over-year work. You have to exclude aircraft, full stop. What Boeing sales to China have to do with the US economy eludes me. Once you do, I like to exclude defense, then focus on capital goods. And voila: http://www.bignose.org/blog/index.php?/archives/201-January-Durables.html
Last month really does look as anything (headed down) since the cusp of the 2001 recession. It could be a blip, but there is no getting around it: that was an ugly datum.
Thanks for the comment. That was fast!
As far as the planes to China, why not exclude all other exports as well? Your chart looks scarier than most of the ones we drew. We like to look at all the components and all the industries to get a little more of a sense, but sometimes you risk getting too lost in the details.
You leave out Boeing because its orders are so lumpy, they’ll swamp domestic trends. That chart wasn’t designed to scare this month; two months back, I used the same series to reassure myself. Viz http://www.bignose.org/blog/index.php?/archives/178-November-durable-goods.html
If you want a really inclusive measure, track the CFNAI, currently pointing at below-trend growth: http://www.chicagofed.org/economic_research_and_data/cfnai.cfm
So far my conclusion is that neither the growth optimists nor the hard-landing pessimists are right. I was buying index calls (though small) at the close.
OK, lumpiness makes more sense than China relevance to me. But if you don’t believe in either a strong bear or a strong bull case, why not sell puts instead of buying calls?
..because it’s a hedge, not a bet. As a hedge, my hope is that I am wrong. I didn’t cover any equity shorts today, though I closed most of my short-carry-trade positions. The calls do up my gamma exposure, but even on a snapback I expect that not to hurt too much.
Makes sense.