Tuesday, November 28, 2006
Today we get the advance report for October durable goods, which are important, and existing home sales from NAR. Tomorrow we get the preliminary third quarter GDP from Commerce, which is a revision of last month's advance numbers. It ought to be revised sharply downward, but I doubt they will bite the bullet and do that.
I haven't read through the durable goods report yet, but it appears signficantly worse than most expected:
Nondefense new orders for capital goods in October decreased $13.6 billion or 15.6 percent to $73.2 billion.This sounds worse than it is, because of recent jumps, but it points out the glaring contradiction between the Fed's predictions and reality. The Fed has been predicting that manufacturing and industrial strength would carry us through the housing recession to a soft landing, and it simply is not so; with unfilled orders increasing, and inventories increasing, we have passed the cusp and we will see a relatively weak performance from this sector in the first quarter. On the 5th we get revised durable goods and non-durable goods. That will be an important release.
The transportation sector was going to drop regardless, but if you take out those numbers durable goods orders still dropped significantly. Reuters:
The biggest drop since July 2000 in orders for durable goods -- big-ticket items expected to last three years or longer -- was propelled by a 21.7 percent fall in transportation orders, the Commerce Department said.The end to the "soft landing scenario" is nigh, because the well of plausible deniability has about run dry. We'll see what Ben has to say today, but last night I was wondering about 50 basis point drop in the first quarter of 2007. It really is that bad, but the Fed cannot afford to stimulate inflation either, which would drive up interest rates for mortgages and put the economy further down the rabbit hole. They are really in a trap; oil prices must fall before they can afford to cut rates.
But even excluding transportation orders, durables declined 1.7 percent as manufacturing, fabricated metal, and computers and electronics orders all slid.
When defense orders were excluded, durables orders fell 6.4 percent, well short of the 0.3 percent rise expected by analysts. It was the biggest decline in that category since a matching drop in September 2002.
A proxy for business spending, non-defense capital goods excluding aircraft, also took an unexpected dive, slipping 5.1 percent.
Crude prices are up, heading for $61 for January deliveries. OPEC is making noises about further cuts too.
The WalMart numbers for November are due on Thursday, but I think WalMart is not a good indicator for the economy as a whole at this point. I also think that they are playing the expectations game and that they will release a slight increase in same-store sales for November on Thursday.
WalMart has mismanaged quite a few of their stores, and their remaining market is the segment of the population worst-hit by inflation. All their attempts over the last eight months have been to broaden their market, but they are fighting a very uphill battle in that effort. Target's numbers are the ones to watch for a better reading.