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An endurable durables report?
Sure, there's things to be concerned about in the latest data, but it may not all be bad.
April 27, 2005: 12:32 PM EDT

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NEW YORK (CNN/Money) - Durable goods orders is one of the most volatile series of numbers the government puts out each month. It often swings wildly higher and then wildly lower, and often it's the biggest-ticket item of all - aircraft - which is to blame.

That's what we see in the March durable goods orders report, and that's one reason why the steep 2.8 percent drop should be taken with a grain of salt.

But it should not be dismissed. The basic trends within the report are pointing lower. And there are other numbers, both for the manufacturing sector and for the consumer, that have softened a lot lately. Manufacturing as measured by industrial production report, fell slightly in March and several of the Federal Reserve's regional manufacturing reports were on the weak side - the notable exception being the "Philly Fed" report which jumped higher. If the softening trend continues, it could mean some more longlasting downshift in the U.S. economy.

As Dave Resler of Nomura Securities wrote Wednesday morning, "The 2.8 percent drop in durable goods orders suggests that the manufacturing sector at least hit a deep pothole in the first quarter."

Resler is especially concerned that orders for capital goods fell sharply for the second month in a row. Makes sense. This category includes the kind of equipment that companies buy when the demand for their goods is growing and they need to expand.

"This may reflect weaker demand from overseas as well the effects of less generous depreciation allowances for U.S. companies," he noted, referring to a tax break for business investment that expired on December 31. "A continuation of this weakness could begin to lower expectations for the second half."

Bulls will say it's not surprising to see some softness as the first quarter drew to a close because previous quarters were strong. Bears will say that high energy prices have taken a toll, and that the U.S. job engine has never gone fast enough to keep the economy moving ahead if it begins to face stiff headwinds, like higher energy prices.

For the Federal Reserve meeting next week, this should kill any talk of a more aggressive half-point rate hike, especially if Monday's manufacturing survey from the Institute of Supply Management (sounds technical but these are the purchasing managers who have a finger on the pulse of business spending, orders, hiring, etc.) is also on the soft side.

A little softness may not be a bad thing. It will help keep long-term bond yields low, and that will keep mortgage rates low. We saw evidence of the loveliness of low rates today in the weekly mortgage numbers where the 30-year fixed rate dipped to 5.75% and both purchases and refinancings were on the rise.

Too much softness of course would not be good. Stock market bears are already growling around, saying earnings guidance is signaling softer earnings ahead. The job market is firmer and for the sake of working families it needs to build momentum, not lose it.

It may be too early to tell if what we are seeing is a one- or two-month blip on the screen, or a warning sign of rough waters ahead. Stay tuned.

Still thinking refi? Check out CNN/Money's Interest Rate Center.  Top of page


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