Untangling Durable Goods and GDP

 | Jan 31, 2013 | 4:30 PM EST  | Comments
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Two government reports released this week provided contrary data concerning the state of the economy. On Jan. 28, the Census Bureau released the "Advance Report on Durable Goods Manufacturer's Shipments, Inventories and Orders, December 2012."

Two days later, the Commerce Department's Bureau of Economic Analysis (BEA) issued the "Gross Domestic Product: Fourth Quarter and Annual 2012 (Advance Estimate)."

The durable-goods report starts with the following:

"New orders for manufactured durable goods in December increased $10.0 billion or 4.6 percent to $230.7 billion, the U.S. Census Bureau announced today. This increase, up seven of the last eight months, followed a 0.7 percent November increase.

"These top lines numbers were immediately viewed as indicative of increasing economic growth by traders of all asset classes and helped to send stocks up and bonds down."

As we get into the report, however, it becomes apparent that the big jump in performance of durable goods was the seasonally adjusted 56.4% increase in December from November for "defense aircraft and parts new orders" and the 110.4% increase in "defense capital goods new orders."

It was not a bad report, but government defense spending is not and should not be considered an indication of broad or private-sector strength.

Putting that aside though, the BEA's GDP report indicates a completely different situation concerning both defense spending and economic activity with this opening sentence:

"Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 0.1 percent in the fourth quarter of 2012 (that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 3.1 percent."

Going from an annual growth rate of 3.1% to negative 0.1% in one quarter is quite a dramatic reversal.

It gets more interesting, though, when we get into the report. In Table 1, line 23 we see national defense spending decreasing by 22.2% in the fourth quarter from the third. This reduction was one of the primary drivers of the fourth-quarter GDP going negative.

The bottom line is that both reports may be providing accurate data: a large increase in month-to-month data with a large decrease in quarter-to-quarter.

Traders have a tendency to rely upon top-line numbers for speculating. Investors need to keep in mind that these reports are simply a collection of data points that provide inputs to a logic system for creating information on the economy.

Both of these, however, assume that the numbers are accurate, not manipulated, and that they are presented at arm's length.

Unfortunately, this is not the case, as I will discuss this weekend. Those of you who want to get a head start on that column can read "Deconstructing Inflation" from last May.  

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