Thursday, 28 April 2005

March US durable goods orders reinforces negative outlook

The weakness in the economy is getting clearer.

Yesterday, the US Commerce Department reported that new orders for US durable goods plunged by 2.8 percent in March, the biggest drop since September 2002. Excluding the volatile transportation category, orders for durable goods fell 1.0 percent. Durable goods orders excluding defense fell 3 percent, also the biggest drop since September 2002.

To make things worse, February durable goods orders were revised down to a 0.2 percent decline from a 0.5 percent increase, while durable goods orders aside from transportation for that month were revised lower to a 0.2 percent fall from unchanged.

The Prudent Investor looks at the durable goods data in the context of other recent figures -- consumer confidence, housing starts and the Philly Fed Index -- and concludes: "Growth finally retreats to the bear's cave". Bill Cara expresses similar sentiments:

Improvement in new durable goods orders is essential in boosting industrial production growth. This report is a significant negative for the equity market, as it follows on several other reports of a rapidly slowing economy in the U.S.

US stocks, however, shrugged off the bad news and managed to end marginally up yesterday on the back of a sharp fall in oil prices after the US Energy Information Administration reported that US crude stocks rose 5.5 million barrels last week to 324.4 million.

Speaking of oil, Barry Ritholtz devoted most of yesterday's postings to oil -- see "All about Oil", "China Syndrome", "Oil Demand versus Capacity", "Wal-Mart versus Oil Prices", "China's Thirst for Oil (and Cancer treatments)", "Capital Spectator", "Oil's Lesser Role? Its all Relative", "But what of the SPR?".

Meanwhile, Brad Setser takes over Stephen Roach's role and worries about global rebalancing.

In the long-run, the more resources (capital and labor) that flow into housing and other non-tradables sector, the harder it will be to move resources out of those sectors and into the tradables sector when the US eventually is forced to adjust. DeLong's model gets this right. Shifts across sectors are not frictionless.

Current growth by and large is coming from the sectors of the US economy (and sectors of the Chinese economy) that would need to slow in an orderly rebalancing story. My worry: the more dependent the US economy becomes on housing, and the more dependent the Chinese economy becomes on exports, the higher the risk the "landing" will be hard rather than soft.

And a landing in the global economy may be closer at hand than many people think. On the back of whiffs of deflation from Japan and Singapore earlier this week comes the report yesterday of Australia's unexpectedly low inflation rate of 0.7 percent in the March quarter, vindicating the Reserve Bank of Australia's decision not to raise interest rates earlier this month.

1 comment:

Anonymous said...

For an excellent assessment of the effect of the U.S. economic slowdown on China's economy, see this newly-released report:

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