While watching President Obama talk about the jobs on The View—he should do more of that stuff, he’s good at it— my other eye was taking in all the commentary on Wednesday’s durable goods report. The latest news on durable goods orders is not encouraging, not just because it shows a monthly decline for June when we were hoping for a slight increase but because it suggests we could be facing new headwinds on the employment front. Here’s the short form of the durable goods news:
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 non-defense aircraft and parts, which decreased $1.8 billion.
The negative report, which also told us that durable goods inventories are up, has import beyond the immediate news. As David Rosenberg at Gluskin Sheff points out, there is a tight correlation between durable goods orders and subsequent changes in employment. As the chart below shows, the jobs payoff–or cost–from a change in durable goods orders comes roughly four months later, and it’s a respectable (as in 82%) correlation. The recent downward turn in orders may quickly reverse, but if it doesn’t we could see the dark line (nonfarm payolls) take a turn for the worse.
Of course, not all economists see this as troubling, and many think the durable goods report was fairly positive given that ‘core’ orders (i.e., non defense capital goods, exculuding aircraft) were up slightly. But the chart shows the correlation with the total number, not the core number. By the way, if you want to enlarge this chart, just click on it.
