We may not be headed for another recession this year, as some forecasters contend, but as the latest report on durable goods shows, there’s no question that global demand remains in a deep funk.
Of course, there’s a lot more to a recession than a protracted slump in orders for durable goods, which are items intended to last more than three years like major appliances, furniture or cars. And although it’s worrisome that business investment is also stuck in a trough, it doesn’t mean the economy is doomed.
What the latest data does say is that the global economy remains stubbornly weak, and U.S. companies are being stingy with their spending.
Orders for durable goods are volatile and subject to big revisions, but there’s no disputing the trend. On a seasonally adjusted basis, orders for durable goods fell 1.4% in February vs. the prior month. Take out the contribution from the transportation sector, and durable goods orders actually fell 0.4% in February. That extends their losing streak to a fifth straight month.
At the same time, orders for nondefense capital goods excluding aircraft fell 1.4% month-to-month in February. That’s the sixth consecutive month of declines and shows that businesses are tightening their belts when it comes to business investment.
A drop in orders for defense and civilian aircraft led to much of the weakness, but plenty of other industries also slowed down, such as machinery, computer products and motor vehicles.
In some cases, pent-up demand for some durable goods has pretty much run its course. Cars, for example.
And to top it off, the strong dollar is hurting exports.
Durable Goods: Rinse, Wash, Repeat
But in many ways, this is just a reprise of what’s come before. The economy got off to a terrible start last year, hurt in part by bad weather, which was a culprit again this year.
More importantly, gross domestic product rebounded from a quarterly decline in growth rate last year to have a couple of its best three-month periods in nearly a decade. It’s no secret that China is slowing, Japan keeps shooting itself in the foot and the eurozone was about seven years late in embracing a policy of quantitative easing.
So we’ve remain in a two-steps-forward, one-step-back economy where opening the corporate coffers is the key to stronger, steadier growth. Unfortunately, businesses see no reason to spend their record levels of cash on anything other than share buybacks and dividends.
There’s simply no incentive to ramp up production when demand isn’t there. That hampers job growth, and by extension, wage gains.
As long as companies can’t find anything better to do with their cash than give it back to shareholders, the stock market is going to remain divorced from the way most workers feel about the economy. Indeed, the market is at all-time highs but something like 65% of Americans think the U.S. is still in a recession.
The latest durable goods report doesn’t mean we’re headed for a new recession, but it sure helps explain why so many people feel like the last one never ended.
