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Saturday, April 28, 2007 8:31 AM

Capital Spending Suggests Hard Landing

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Lost in the headline Capital spending bounces back in March is the fact that first quarter capital spending was down 15.3% annualized.

Demand for U.S.-made durable goods increased 3.4% in March, led by orders for aircraft and capital equipment, the Commerce Department reported Wednesday. "Capital spending is not in free fall," as some had feared, wrote Jan Hatzius, chief economist for Goldman Sachs, in a research note.

Economists were divided about whether the report was merely a one-month reprieve or a more fundamental turnaround in capital spending.

"With capital spending having fallen in the final three quarters of 2006 and quite possibly again in the first quarter of this year, the bear camp will rationally assert that the trend is down," wrote Tony Crescenzi, chief bond market strategist for Miller Tabak & Co., in an email. "Armed with today's today, the bull camp will disagree and assert that a rebound is underway."

Treasuries sold off on the robust data. The market got it wrong, wrote Charles Dumas, an economist for Lombard Street Research. "The durable goods orders data confirm that business cap-ex [capital spending] is front-running a U.S. hard landing."

Demand for core capital equipment increased a robust 4.7% after a cumulative 8.5% decline in January and February. It was the biggest gain in this key gauge of business investment since September 2004. Still, the first quarter was the weakest for core capital equipment orders since the 2001 recession, falling at a 15.3% annual rate.

Durable goods have really been carried by civilian aircraft orders as Boeing booked orders for 119 planes in March compared with 57 in February. Outside of that, there has not been much to cheer about.

It is clear this economy is faltering.
Barring some sort of miracle recovery, the next move by the Fed will be a cut. It will not save housing and in fact mortgage rates may not even decline due to increased default risk

Mike Shedlock / Mish

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