US Durable Goods Orders: Another Point for a Good Q3 GDP
By Marc Chandler
Today’s durable goods orders data lends credence to our projection of fairly robust Q3 US GDP after the dismal 0.8% expansion in H1. The durable goods report is the third important piece of data that should encourage economists to look for something close to what is regarded as trend growth in the US (2.5%-3.0%). The sharp rise in July personal consumption expenditures and the smaller real trade deficit were the other two piece.
Durable goods shipments excluding defense and aircraft, are a useful proxy for capital goods spending in (nominal) GDP calculations. These shipment roses 2.8% in August (the strongest since March), following a 0.4% rise in July. They have risen at an annualized pace of a little more than 16% over the past three months, up from 11.2% in Q2 and 3.9% in Q1.
Reports indicating that Corporate America balance sheets are flush has given rise in some quarters to arguments that they are hoarding cash. And yet business investment, not in plant, but equipment remains a bright spot in the economy. Capital goods orders rose 4.2%. Business investment in equipment and software appears to be running at around double the 7.8% pace seen in Q2. Consistent with this was yesterday’s announcement by IBM and Intel to invest $4.4 bln over the next four years to create a new facility in New York for the next generation computer chip.
Tomorrow the US will report revisions to Q2 GDP. It is expected to be revised from 1.0% to 1.2%. On Friday the August income and consumption will be reported. There is little chance that consumption expenditures can keep pace with the 0.8% rise in July. However, even with the consensus 0.2% rise, the resilience of the consumer will be still be clear after the exceptionally poor Q2 and little improvement in terms of employment and earnings.
Next week’s data include the ISMs (still above 50), auto sales (potential for upside surprise) and of course, the highlight, the national jobs report, where the early call is for the private sector to have added another 100k to the payrolls, after a disappointing 17k in August. The US data will stand in stark contrast to the euro zone data, where it will be recalled the flash PMI composite reading below 50 warns of continued economic weakness.
The only outcome for coming quarters is downwards. I think with the EU about to enter into depression territory over the next year the prospects for the US are no better. Then add in CDS losses when Greece and possibly others default, and the US banks will probably be cutting lending dramatically in future quarters as they try to rebuild capital. That will slow the US economy. This will really impact the small businesses that are most likely to provide new jobs. The big companies will just sit on their cash. We are facing a coming depression which the Obama stimulus had delayed. Though without some maintenance of that stimulus the US faces being dragged back into a depression.
From 2008 until mid 2011, the Fed has pumped $1.0 trillion into residential mortgage backed securities, Treasuries and Fannie Mae and Freddie Mac securities in an attempt to prop up the faltering housing market and reduce mortgage rates. This money has finished up as additional bank deposits in the Fed, higher prices for shares and commodities, and higher U S investment in foreign assets and securities. It has not stopped the decline in U S house prices, added to jobs or even increased the value of banks’ mortgage securities. (Perhaps it created a few more exports by driving up the value of foreign currencies.)
How can it be otherwise when the Fed does not have the power to intervene directly in the real economy and Congress will not. The Fed is limited by law to financial securities. Individuals with the ability to think the problem through have no power and those with power are mostly interested in justifying their idealogical positions.
Regardless of the greed and stupidity that drove mortgage securitisation, too many houses were built with too little of the home owner’s money as security. When the bubble burst and prices fell, it was logical for homeowners to look after their own security and stop spending. Unemployment spread from builders, builders supplies and home furnishings to the wider economy. People afraid for their job will not spend.
Who has the power to recreate that sense of security? Only Congress. How can they?
Two million homes can be removed from the market for $500 billion. House prices that have already fallen 35 to 40% will stabilize, retaining whatever equity people have left in their homes. Builders will go back to work. Building supplies and furnishing businesses will recover. Banks stockpiles of mortgage securities can finally be valued, real losses taken and new capital raised. In time the houses can be trickled back into private ownership exactly like the Fed’s stockpile of Treasuries.
Banks have benefited from the Fed’s present cheap money policy. Existing homeowners have not. This is a national emergency is it not? Take the bull by the horns and pass a law that allows any homeowner to refinance their mortgage at current rates. Many homeowners would be released from the threat of repossession. With greater security, a recurring 2% in homeowners’ hands on all the mortgages in America would create a wave of spending and new jobs.
A further $500 billion immediately available for state and federal infrastructure would create two million more jobs. The first $1.0 trillion the Fed pushed into the economy brought only temporary stability for the better off. By its nature, it could not create jobs or cure the housing crisis. A second $1.0 trillion injected directly into the economy would do so. Who has the foresight? Congress?
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