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Friday, August 24, 2007

Really Strong Durables Report

This is an advance report (get the whole thing here), but the previous advance was revised up also.

The remarkable strength of this report is that it shows depth, and shipments are now rising, which is a very encouraging sign.

After two disappointing months, primary metals new orders were up 7.9% and shipments were up 1.5%. Fabricated metals rose as well, though not as much. New orders and shipments for machinery rose, after two months of declines.

The remaining weakness is largely in computers and related, which is natural enough. Those numbers correlate well with opening of new establishments, and retail growth should be slowing which should depress those numbers.

To fully comprehend the exceptional strength of this report in comparison with recent trends, get the entire report at the link above and compare this month's figures to the two prior months and to the 2006/2007 YTD numbers.

I feel more sure than ever, although I cannot prove it, that the B/D models are causing BLS manufacturing related employment to be understated in recent months. The recent reads on the Japanese and German economies have showed some disappointments in growth, so I think this report may represent some gains for the US in heavy production versus those economies. The driving force is probably helping the US to gain share.

The necessary move transition away from a consumer-led economy and back to an economy based on fundamental production may be well underway. This is a strikingly healthy report, and no one can fairly accuse me of relentless, heedless optimism.


Comments:
Mama,

How's the report look if you strip out the airline orders (ie Boeing?).

J
 
Still good. Far less of a one-ring circus than it has been since last year. Ex-aircraft, non-defense capital goods shipments are up 0.5% and new orders are up 2.2%

Mind you, it would take a few more months to do better than 2006 in that category....
 
Oh happy day! I feel like putting lots of money in the stock market!! And new home sales are up, too.
 
But, weren't you predicting a recession a short time ago?

Do you jump from datapoint to the next?

Just wondering.
 
Also (jest wond'n ya understand), didn't you call into question the labor report of housing as overstated? Now manufacturing is understated? I'm think'n I should just read your postings on religion. They are much more emperical. Your economics is to metaphysical for me.
 
Tom, no, we are in a recession by all classical standards now, and the problems with credit mean that we won't get out of it very quickly.

The question now is how bad a recession, and how long a recession, and this is at least an indication that we have some slow positives developing. This is what recessions do. They redirect bad investment into good investment.

We got ourselves here by diverting investment away from fundamental production (energy and products) and into non-sustainable consumption (houses and cars borrowers can't afford). To get out we have to grow production.

What everyone's wondering about this report is whether this can be sustained for very long given the credit situation. If the credit contraction cuts off the flow of capital to industrial companies, we won't.
 
Dr. M, those new home sales mean nothing in the current circumstance. First, they are not even statistically significant. We don't in fact even know if home sales did rise last month. There is a good possibility that they didn't. The only statistically significant number on that report was the YoY YTD percent change from 2006 to 2007, which now stands at -20.9%. So we fell last year, and we keep falling this year.

Also, months on market went up again to 6.1. So it is likely that the new home market is still getting worse. I wrote before about the extreme noise to signal ratio on New Home Sales. That noise to signal ratio gets worse as the numbers get smaller. That's the reason I rarely write about it. Most of the figures on the report don't actually give you any reliable information.

Remember when I wrote about not selling stocks that had a strong underlying business, low debt and a good cash flow? This is why. I think your decision was right for your family's situation, btw. You are a smart woman.
 
Tom - specifically as to housing and manufacturing employment, here's the situation. The BLS samples, and then produces figures based on those samples. The figures would always be understated because some businesses go out of business if they just relied on the sampling. So what they do is use base records to keep track each year of businesses starting up, expanding, cutting and closing. Then they use those figures to adjust their samples. It's called the B/D model (for birth/death).

Because they use this procedure that is really based on the economic conditions from the prior year, when economic conditions change sharply the B/D model gets out of whack.

The B/D model gets out of whack on both the positive and negative sides. Generally when conditions improve, it will understate employment for at least six months. When conditions get worse, it will overstate employment for at least six months.

Needless to say, this introduces a lot of uncertainty into matters. There is no question that the B/D model overstated construction jobs, because the preliminary adjustments from last year are coming in and showing that they overstated construction by about 95,000. Thus the liklihood is that this continues, given trends in the industry.

It is just as possible that they are understating manufacturing jobs now. Not hugely, but it would explain some puzzling discrepancies in sales and use tax data in some manufacturing-heavy areas. They are doing better than they should be doing, and it is likely that some missed activity is the cause. Because these counties are areas with signficant manufacturing, the likliest cause is increased manufacturing hiring.
 
MaMa,

Thanks for your responses. You are a good teacher.
 
Thanks, Vera. I'll check it out.

MOM; Durables is a flakey series. I like your railroad and trucking data a lot more.
 
Very flaky, and more so because of high inflation now.

TSI is really down in the dumps. The latest is June, but TSI freight showed the biggest drop since the beginning of the index. TSI passenger has a three month decline going on, and that is significant.

I feel very comfortable stating that we are in a recession.
 
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