Durable Goods Rebound In June Augers Well For The Economy
Saxo Bank | Jul 28, 2014 06:31AM ET
• New orders for durable goods rose 0.7 percent in June after a revised 1 percent fall in May
• Rise fuelled by demand for machinery, transport, civil aircraft, parts and capital goods
• The value of the new orders increased USD 1.8 billion in June to USD 239.9 bn
One may wonder why there is excitement about the latest reading for new orders of durable goods in the US. After all, the chart shows it is a capricious data point.
• Durable Goods Orders (MoM) actual 0.7% expected 0.5% previous -1.0%
• Core Durable Goods Orders (MoM) actual 0.8% expected 0.6% previous -0.1%
The interest lies in the fact that not only did the data from the US Census Bureau show a significant rebound in June from May, it also raises the expectation that capital investment will add momentum to US economic growth during the second half of 2014. Capital investment is a firm's acquisition of capital assets or fixed assets such as manufacturing plants and machinery that is expected to be productive over many years.
If one takes the quarterly average reading of durable goods orders and lags it by one quarter against GDP quarter-on-quarter, one establishes, with a sixth degree polynomial regression, a correlation of 0.6772.
That implies the mean level of durable goods orders in time period t, will have a significant impact on GDP growth in time period t+1.
Durable goods and GDP
Source: US Census Bureau, Bureau of Economic Analysis, Spotlight Ideas
Re-stocking the shelves
Consumer Confidence in the US averaged 71.68 over 2008-14. Each reading since last December has been above 80.0. Any sense that consumer sentiment is on the rise and can be sustained will be a signal for businesses to accumulate inventories. Therefore factories increase their appetite to invest to invest in durable raw inputs such as aluminium, iron and steel.
Following the Q1 2014 QoQ reading of GDP growth at minus 2.9 percent due to unexpected cold weather, the street sentiment has been for business investment to pick up in Q2 from April to July.
Most of the 0.7 percent gain in durable goods orders comes from businesses and is aligned with the other positive manufacturing data. Manufacturing industrial production climbed an annualised 6.7 percent in Q2 if one refers to data provided by the Federal Reserve. That is the fastest pace in the past two years and is up from just 1.4 percent in Q1. It augers well for Q2 GDP growth.
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Jobs coming back
One interesting phenomenon is the fact that global corporations are starting to locate or relocate manufacturing jobs in the US.
Manufacturing jobs account for 8 percent of the US American labour market, but in dollar terms, manufacturing contributes 13 percent of nominal GDP and the sector is a bellwether indicator on the economy.
Of course the wage differential favours the emerging nations, but it has not gone unnoticed that the wage advantage is steadily diminishing as the productivity of the American workers rises. Similarly, freight and shipping costs have increased and a spin-off benefit from the exploitation of shale gas drilling gives the US access to cheap domestic energy that supports industrial manufacturing.
Corporations are scrutinising every aspect of the cost of manufacturing and for an American firm, if the cost advantage between say China and the US is under USD 10/hour when one factors in the lower inventory and transportation costs, access to market and the ease of doing business, then suddenly the case to stay in the US become rather appealing.
In the February 2012 survey from the Boston Consulting Group, 37 percent of all American manufacturers that had top line revenue in excess of USD 1 billion said they were considering shifting some production from China to the US. They cited the fact that as China became increasingly prosperous so wages and benefits were rising in China. However, a common consideration was that China was imposing tighter labour laws, industrial disputes and strikes were becoming more frequent and there were concerns as to the integrity of industrial intellectual capital.
This has occurred at a time when American productivity has been rising and organized labour is in decline so acting as a magnet to draw large cap American multinational corporations home, particularly to the non-union South.
This bodes well for the economy and for top line and bottom line gains so supporting higher stock prices.
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