U.S. Durable Goods Orders: Not So Rosy After All

Yesterday, we saw the news headline that U.S. durable goods orders for May beat economists’ expectations. Not so fast.

The U.S. durable goods report is an important gauge of economic recovery, because it focuses on big-ticket items that are purchased by businesses and consumers that are meant to last at least three years; a sign of business and confidence in consumer spending.

Durable goods orders increased 1.1% in May on expectations of 0.5% (source: Commerce Department). This is a nice upside surprise and seemingly a sign of economic recovery. However, when the volatile transportation orders are removed from the figure, it is a miss: 0.4% on expectations of 0.7%. Economic recovery, really?

The most important part of the durable goods orders number that best reflects how the economic recovery is holding up and the future outlook for consumer spending is the core durable goods number, which leaves out transportation and defense orders. Core durable goods orders were up 1.6%—after a disastrous April—when economists were hoping for a stronger rebound of 1.9% just because April’s number was so weak.

Worse still is that, year-to-date, the increase in durable goods orders is the weakest since the same period in 2009. This is not an indication of an economic recovery. This is more evidence to the contrary, pointing to an economic slowdown. This slow growth in orders can only mean that consumer spending will continue to be weak as well.

A few months ago, I presented a chart highlighting the record amount of durable goods inventory being created in this country. Well, in 28 of the last 29 months, inventories have continued their relentless climb upward. This month marked another record $365.8 billion on the shelves.

This means fewer goods are sold and shipped while more goods gather dust on the shelves. This is not a sign of an economic recovery and stronger consumer spending—just the opposite. (See: “U.S. Retail Sales Numbers Now at Worst Point in Two Years.”)

So when the headline number comes in at 1.1%, what they don’t tell you, dear reader, is that the biggest gain in inventory since January made the number look larger than it really is. So while the stock market may appear to celebrate an economic recovery with strong consumer spending, the truth is that with inventory build-up removed from the equation, the picture doesn’t look rosy at all.

Where the Market Stands; Where it’s Headed:

We are in a bear market rally in stocks that began in March of 2009. The rally is tired and “long in the tooth,” as they say. World economic growth is slowing quickly, which will put pressure on the profits of public companies, thus resulting in lower stock prices.

In a nutshell, the bear market rally we’ve been experiencing since the spring of 2009 is almost over. The market is only presently being held higher on the hope that the Federal Reserve will come to the rescue again with another form of quantitative easing (i.e. money printing).

What He Said:

Prepare for the worst economic period ahead that we have seen in years, my dear reader, as that is what I see coming. I’ve written over the past three years how, in the late 1920s, real estate prices fell first before the stock market and how I felt the same would happen this time. Home prices in the U.S. peaked in 2005 and started falling in 2006. The stock market is following suit here in 2008. Is a depression coming? No. How about a severe deflationary recession? Yes!” Michael Lombardi in Profit Confidential, January 21, 2008. Michael started talking about and predicting the economic catastrophe we began experiencing in 2008 long before anyone else.