Commentary: Durable goods underwhelming if you read fine print
By MarketWatch
WASHINGTON (MarketWatch) — Demand for manufactured goods is weakening, but don’t tell that to investors, who are in one of their periodic giddy moods.
U.S. stock markets opened higher on what was thought to be optimistic news about the manufacturing sector. Yields on 10-year Treasurys 10_YEAR +2.00% breached 2% for the first time in nine months. Read Stock futures rise on durable goods, Caterpillar.
But the news that sparked this optimism wasn’t really great news at all. Caterpillar CAT +1.38% , the blue-chip equipment maker, reported a quarterly profit, but also a big drop in revenue. It seems global demand is weakening, and Cat earned a profit only by sharply cutting back its production. Read Caterpillar’s profit fall 55%.
That’s bullish?
Investors also welcomed the U.S. government report that orders for durable goods jumped 4.6% in December. That headline certainly caught the eye of investors, who ignored the inconvenient truth that the details of the report were anything but bullish. Read Orders for long-lasting goods jump 4.6%.
The durable goods report frequently fools investors who aren’t paying attention. The headline number can surge in one month only to plunge the next. Half the time, the number either rises or falls by more than 3%, mostly because of large swings in orders for defense goods or for civilian aircraft.
Of the $10 billion increase in orders in December, $8.7 billion was accounted for by defense goods and $1.3 billion by civilian aircraft.
In other words, the entire gain was based on two sectors that have little to do with the underlying state of the U.S. economy, or with business investment in general.
Looking strictly at the trend for capital equipment excluding defense and aircraft is the best way to analyze the durable goods report, because that tells us whether businesses are investing or not. In December, capital spending (shipments) rose 0.3%. Over the past six months, capex has fallen at a 0.6% annual rate.
The other data on manufacturing tell much the same picture. The ISM manufacturing index is hovering around the break-even 50% mark. Manufacturing output is still growing but at a much slower rate than a year ago, according to the Federal Reserve.
Manufacturing is no longer leading the recovery, as it was a year ago. Monday’s reports don’t change that truth.
