Tony C. Blog/Street.com
Biz Spending Is Weak
03/28/2007 8:15 AM
There is no saving grace within today's report on February durable goods orders. Weakness has carried on for too many months for the latest weakness to be explained away. In addition, the weakness makes sense when put in the context of the slow pace of economic growth over the past year. Only if economic growth accelerates will the situation improve. Spending leads orders.
Overall, durable goods orders increased 2.5%, but the increase was solely because of a 9.6% surge in transportation orders, which increased largely because of a surge in orders for new aircraft (Boeing received orders for 51 aircraft in February compared to 13 in January). Excluding transportation, durable goods orders fell 0.1% following a 4.0% decrease in January. It was the fourth decline in five months.
Capital spending also looks weak. Orders for nondefense capital goods excluding aircraft, a key gauge of capital spending activity, fell 1.2% following a 7.4% decline in January, which was the biggest decline in three years. It was also the fourth decline in five months. The decline in business spending makes sense. The economy grew below its potential in the final three quarters of 2006, expanding at a pace of just 2.3%. In the current quarter, growth again appears to be running below potential, which is widely believed to be around 3%, owing to 2% productivity growth plus 1% growth in the labor force.
With demand for goods and services running below the economy's ability to produce goods and services, companies have little need to add new capacity. Hence the weakness in capital spending. This won't change until demand picks up and consumers aren't exactly in the best of shape to carry the load. The hope is that the situation will turn by mid-year when the drag from the recent plunge in home construction begins to diminish, but this prospect is at risk now that some of what is ailing the consumer has become self-feeding.
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