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Wednesday, July 28, 2010 1:47 PM

Durable Goods Orders "Unexpectedly" Sink; How did Economists Blow the Call?

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I cannot help but laugh at economists who refuse to see the economy is slowing dramatically, and somehow think manufacturing is going to lead the way to recovery.

Check out this headline on Bloomberg prior to the durable goods report: Orders for Durable Goods in U.S. Probably Rebounded in June

July 28 (Bloomberg) -- Orders for durable goods probably increased in June for the sixth time in the past seven months, showing business spending is supporting the U.S. recovery, economists said before a report today.

Bookings for goods meant to last at least three years rose 1 percent after dropping 0.6 percent in May, according to the median of 76 projections in a Bloomberg News survey. Excluding transportation gear, orders may have grown 0.4 percent.

“Business spending, particularly for capital equipment, is holding up,” said Ken Mayland, president of ClearView Economics LLC in Pepper Pike, Ohio. “Ordering is strong as companies ramp up and resupply.”

Federal Reserve Bank of Philadelphia President Charles Plosser said July 26 that there is fundamental strength in the economy. “I think there is underlying strength there that is still there,” Plosser said in an interview with Bloomberg Television in Washington.
In the Bloomberg survey, the median and average forecasts were for an increase of +1%. The high forecast was a preposterous 4%.

Excluding transportation, the median forecast was +.4% and average +.2%.

Individual Forecasts 1.5 Percent or Greater

  • Barclays Capital +1.5%
  • BNP Paribas +4.0%
  • Citi +1.6%
  • Desjardins Group +2.0%
  • High Frequency Economics +2.0%
  • J.P. Morgan Chase +1.7%
  • Janney Montgomery Scott +3.2%
  • Landesbank Berlin +2.8%
  • Nomura Securities Intl. +3.0%
  • PineBridge Investments +2.5%
  • Raymond James +2.0%
  • RBC Capital Markets +2.3%
  • Ried, Thunberg & Co. +1.5%
  • Thomson Reuters/IFR +2.9%
  • Wrightson Associates +1.5%

Individual Forecasts Below Zero Percent

  • 4CAST Ltd. -.5%
  • IHS Global Insight -0.8%
  • MF Global -1.0%
  • Morgan Keegan & Co. -0.5%

The Actual Report

Inquiring minds are reading the Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders June 2010
New Orders

New orders for manufactured durable goods in June decreased $2.0 billion or 1.0 percent to $190.5 billion, the U.S. Census Bureau announced today. This was the second consecutive monthly decrease and followed a 0.8 percent May decrease.

Excluding transportation, new orders decreased 0.6 percent. Excluding defense, new orders decreased 0.7 percent.

Transportation equipment, down four of the last five months, had the largest decrease, $1.1 billion or 2.4 percent to $45.9 billion. This was due to nondefense aircraft and parts, which decreased $1.8 billion.


Shipments of manufactured durable goods in June, down two consecutive months, decreased $0.7 billion or 0.3 percent to $195.0 billion. This followed a 0.7 percent May decrease.

Computers and electronic products, down four of the last five months, had the largest decrease, $1.3 billion or 4.1 percent to $31.3 billion.

Capital Goods

Nondefense new orders for capital goods in June decreased $1.1 billion or 1.6 percent to $64.1 billion.

Shipments increased $0.6 billion or 1.0 percent to $63.2 billion. Unfilled orders increased $0.9 billion or 0.2 percent to $486.6 billion. Inventories increased $1.3 billion or 1.0 percent to $128.1 billion.

Defense new orders for capital goods in June decreased $0.7 billion or 6.8 percent to $9.6 billion. Shipments decreased $0.1 billion or 1.5 percent to $9.8 billion. Unfilled orders decreased $0.2 billion or 0.1 percent to $139.6 billion. Inventories increased slightly or 0.1 percent to $17.9 billion.
Stunningly Bad Report

That was an across the board stunningly bad report. Note that it is impossible to blame defense spending and transpiration spending for the miss. Those categories, especially defense can be extremely volatile.

Check out computers: Computers and electronic products, down four of the last five months, had the largest decrease, $1.3 billion or 4.1 percent to $31.3 billion.

Does that explain why Intel did not light up the tech sector? I think so.

Look at the forecasts again. There are many names the average person has heard of in the list of those blowing the forecast. Most would not recognize the names of the the few who got it right.

Flashback Wednesday, July 14, 2010: Expect Second-Half Housing and Durable Goods Crash
Those who think manufacturing is going to lead the way to a sustainable recovery need to think again. Data suggest durable goods sales are about to collapse. ....

Pundits everywhere seem to think Intel will jump-start a further stock market rally. Articles are everywhere you look. They said the same thing in April, and look what happened.

In contrast, I see little fundamental reason for business spending to pickup from here, and no technical reason to think anything other than Intel's blowouts are more than priced in.

So, if consumers are not going to be buying appliances (or cars according recent surveys), and if commercial real estate is going to remain in the dumps, technology spending is likely unsustainable, and states will be laying off workers to balance budgets, pray tell where is the second half growth or jobs coming from?

Here's a hint: Don't expect miracles from further stimulus either.

The current Congress is not much in the mood and the next Congress is likely to be downright hostile to significantly more deficit spending.

All things considered, earnings estimates and the stock market are both priced well beyond perfection, as are forward GDP estimates.
In light of Consumption Inflection Point - No One Wants Credit; Consumer Spending Plans Plunge I do not think the durable goods call was difficult. Apparently it was.

Mike "Mish" Shedlock
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