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Wednesday, September 26, 2007

OUCH! Durable Goods

The really bad number is not the headline drop of 4.9% in new orders, but new orders for nondefense capital goods:
Nondefense new orders for capital goods in August decreased $10.2 billion or 12.6 percent to $70.9 billion.
That's ugly. Inventories did decrease a bit, which generally would be a positive sign for future new orders. In this case, one wonders.

I feel cheated. One good report, and then this? These figures are so volatile month to month that one needs to keep one's head and look at trends.

The full release is available at the above link. On the left, choose the format you like and download the advance. This is a link to the pdf version. If you look at YTDs (2007 YTD/2006 YTD), shipments (Table 1) are running ahead of last year, but inventory (Table 2) is up too, and it's up even more. Note that these are currency measures, so cost increases and decreases do show up in this report and can mask volume changes.

Non-defense aircraft and parts have been the star of this report for quite a while, but a new trend seems to be emerging. Inventory is up 25% YoY YTD, and:
YTD: 20.1
Jun: 2.8
Jul: 9.6
Aug: 1.5

New Orders:
YTD: 47.8
Jun: 37.1
Jul: 13.2
Aug: -41.0
We'll see. The recent economic news has tended toward the depressing side, whether it's housing stats, retail sales or confidence/expectation surveys. The Euro news isn't really much better.

Statistical noise is to be expected, and outliers are also to be accounted for.

The trend does tell the story in a more impartial way, but gee this is a big change.

Against the problems in residential RE, Problems starting in CRE(the cost of loans depends on long term rates which are going up), Retail Sales and things are looking ugly.
Yes, Vader. It may be cheering up Wall Street, because they are definitely expecting another rate cut. Not a lot of fun for someone who's been laid off, though.

I really am sorry, btw.
Normally declining inventories is a leading positive but I don't think this is a normal time. I look at it more as a case of raising cash any way possible and fear of being left holding the bag when the music stops. Hovnanian certainly thinks this way. Do you consider their recent draw down of inventory to be a positive going forward?
I'd like to, but when I look at the relationship between shipments and inventory it looks like it will be a while before it could have much of an impact. Then too, it may be that a slump in demand and high unfilled orders means that there is really quite a backlog.

That's why I read the detailed reports. They had started to look better, but now they seem to have turned around again. The preliminary has more information by category so I'll be waiting for it.

A build up of inventory shows as a positive for GDP, though. Snort. Another reason why GDP numbers need to be taken with a grain of salt and a lot of perspective.
This old dawg remembers how the 70s oil shock and 80s recession caused industrial orders backlogs to evaporate every bit as fast as we see home buying interest lists go poof today.

It's going to be wierd. Boatloads of plasmas off the shore of Long Beach/Los Angeles with no place to offload because the port is clogged with empty sea containers and the transportation pipeline from retail backrooms to railroad in transit is full. Watch the BLS ton-miles.
You too? I've been staring at the shipments vs new orders all year, wondering.
The old time inventories has been eliminated in favor of the just in time inventory.

However, for holidays, the stuff has to be ordered months in advance. Sooo the stuff is either already here or on its way. I do not know if it can be canceled or not. Likely not.

So what happens if demand goes to the bottom? Gonna be a long tail of stuff coming in and little going out. I guess it will be just stacked in place. Though there are precedents for dropping it off the side of the ship.
Vader - you hit on one of the remarkable stories never discussed about retail profits in the last few years. There has been a large drawdown in inventory on hand, and therefore profit figures are overstated. It's quite notable if you go into some stores with lower traffic. You find empty shelves.

Another way to look at it is that retail overall is way oversupplied, which diminishes sales at individual stores, but this doesn't account for the big drawdown in stocks for chains like WalMart.
The corollary of reduced inventory in the pipeline is the excess of shelfspace. While the MSM is all atwitter over big box stores the truth is the US has much more retail square footage than every other nation with a bullet. Consider this Kunstler graph: http://jameshowardkunstler.typepad.com/.shared/image.html?/photos/uncategorized/2007/06/25/mags_diary21_retail_graph_2.jpg

If you are concerned about the 4 million surplus of residential housing then you are missing the elephant in the corner.
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