Durables Look More of an Outlier

 | Apr 25, 2012 | 5:30 PM EDT
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Durable goods orders in March fell 4.2% and 0.8% for the key component of business capex spending, non-defense capital goods excluding aircraft. Investors had been expecting total orders to fall by 1.7%, after gaining 1.9% the month before.

But looking at new orders in the ISM index, coupled with two Federal Reserve district surveys, we can probably get a sense that the weakness in today's durable goods orders was the outlier by manufacturers themselves, rather than the start of a new trend. 

Manufacturing continued its growth in March as the headline purchasing managers index registered 53.4, an increase of 1 point when compared to February's reading of 52.4, according to the ISM. It's been in the same ballpark range since mid-2011. A reading above 50 indicates that the manufacturing economy is generally expanding. 

New orders registered 54.5 in March, which is a decrease of 0.4 point when compared to the February reading of 54.9. This represents a continuation of growth for the 35th consecutive month, but at a slightly slower rate. The ISM observes that a New Orders Index above 52.3, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders (in constant 2000 dollars).

The Empire State Survey headline index fell significantly in April, though it still indicated a modest increase in activity. The general business conditions index dropped fourteen points to 6.6, suggesting that while growth continued, the pace slowed over the month.

But manufacturers in the New York Fed district are much more optimistic about the future.  Fifty-four percent of these companies, which represent a tech-heavy bias, expected conditions to improve in the months ahead, but only 7% expected conditions to worsen. The future general business conditions index fell four points to 43.1, but still well above the zero line that separates optimism from pessimism.

For the Philly Fed survey, we see a similar pattern. Manufacters (which include many automotive and heavy industry manufacturers in this Fed district) responding to the April business outlook survey indicated that regional manufacturing activity expanded modestly this month. The survey's broad indicators for general activity, new orders and shipments all remained positive, but fell slightly from their readings last month. The future general activity index increased modestly, from a relatively high reading of 32.9 in March to 33.8 this month, but still well above zero.

The Philly Fed Survey, like its Empire State Survey counterpart, both show notably increased intentions to hire. In the next six months, in the Philly Fed survey, the percentage of those firms that plan to add to staff (35%) was significantly greater than those expecting to decrease employment (7%).  Likewise, in the New York Fed District, we see that 33% of employers plan to hire, while just 9% plan to cut staffing levels.

If you subscribe to the view that hiring intentions are a good barometer of how businesses feel about their prospects, then these optimistic signs probably should outweigh the concerns you might have about today's durable goods orders.


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