JACKSON HOLE, Wyo. -- Wow.
numbers released this morning show that shipments of
are on track (assuming a 1.1% September decrease) to post a 9.4% (annual) increase during the third quarter following a 7.6% gain during the second. That increase will go down as the second biggest in almost two years.
nondefense capital goods
(or NDCG) are on track (assuming a 0.9% September increase) to post an 18.3% (annual) increase during the third quarter following a 12.6% gain during the second. That increase will go down as the second biggest in more than two years.
nondefense capital goods excluding aircraft
(or NDCGEA) are on track (assuming a 1.5% September increase) to post a 23% (annual) increase during the third quarter following a 14.3% gain during the second. That increase will go down as the biggest since the fourth quarter of 1993.
So much for quarterly changes (which speak to what we can expect from the third-quarter
gross domestic product
report to be released at the end of October). How about year-on-year changes (which speak to trend)?
Shipments of durables were rising at an 8.8% rate as of last month (compare to a 5.3% increase for all of 1998). That marks their fastest pace of acceleration in 20 months. This series bottomed during the third quarter of 1998 (when it was rising at a 3.6% rate) and has generally been showing acceleration since.
Shipments of NDCG were rising at a 12.4% rate as of last month (compare to a 10.8% increase for all of 1998). That marks their fastest pace of acceleration in nine months. This series bottomed during the first quarter of this year (when it was rising at a 5.7% rate) and has been showing acceleration since.
Shipments of NDCGEA were rising at a 10.6% rate as of last month (compare to a 9.5% increase for all of 1998). That marks their fastest pace of acceleration in 14 months. This series bottomed during the first quarter of this year (when it was rising at a 4.2% rate) and has been showing acceleration since.
So much for the past and the present. How about (noting that orders during one quarter generally predict shipments during the next) the future?
Orders for durables are on track (assuming a 2.3% September decrease) to post an 18.6% increase during the current quarter. That gain will go down as the biggest since the first quarter of 1994.
Orders for NDCG are on track (assuming a 4.9% September decrease) to post a 27.4% increase during the current quarter. That gain will go down as the second biggest in a year and a half.
Orders for NDCGEA are on track (assuming a 1.5% September decrease) to post a 21% increase during the current quarter. That gain will go down as the biggest in two years.
What do all these really stupid (and terribly boring) numbers mean?
Three pretty-easy-to-understand things.
(a) Business investment is still strongstrongstrong.
The NDCGEA shipments numbers above, combined with neutral-to-robust performances from the auto and air sectors during the July-August-September months, indicate as much. (See this
column for details about how the durables release fits into the broader investment and GDP pictures.)
Business investment surged 15.9% (and added 1.22 percentage points to overall growth) during the second quarter.
It looks to rise (and add) even more than that during the third.
(b) Business investment is unlikely to drop dead in 1999.
The orders numbers above work against the notion that the pace of investment will slow meaningfully (or even at all) during the final quarter of the year.
Some kind of surprise is always a possibility -- August numbers could be revised down sharply or orders could suddenly crash outright -- but right now investment looks to keep kicking at least through year-end.
(c) Business investment continues to make many forecasters look stupid.
A less rapid pace of business investment in equipment and structures was expected in light of the decline over the past year in the rate of utilization of production capacity and the moderate growth projected for sales and profits.
The growth of business capital spending was expected to slow from the unusually rapid pace of recent quarters in response to the projected smaller increases in sales and profits arising from moderating economic growth.
The members anticipated that the pronounced increase in investor and lender perceptions of risk would result in considerable moderation in the growth of overall business investment, especially in light of concurrent expectations of reduced gains in sales and profits and evidence of some diminution in both internal and external sources of financing.
The increase of private final demand would be restrained by slower growth of spending on consumer durables, houses, and business equipment in the wake of the prolonged buildup in the stocks of these items.
These precious gems, taken from the forecast sections of the minutes of
meetings going back as far as March 1996 and extending right through June of this year, show that the Feds have been predicting business investment slowdowns for more than three years now.
And so, too, have many of the New Era types.
Which, if you think about it for a minute, is most odd.
Why would the people pinning their hopes on faster and faster increases in trend productivity growth continue to forecast slowdowns in the production of the very things that stand to deliver them?
A word of caution.
The popular press, the slowdown crowd and the Fed's-too-tight gold bugs (among others) will try to talk down the durables number by excluding this category or that from the headline figure.
The strength of the August increase surprised economists, who were actually looking for a 0.9% decrease, but the gain was centered in the volatile transportation category.
Orders for civilian aircraft surged 38.2%, but excluding transportation, orders were down 0.2%, continuing a seesaw pattern that suggests some cooling at factories across other categories. The report is mixed, and less impressive than the headline number suggests.
It is one thing to exclude certain categories for the purposes of unearthing a truer underlying trend.
To exclude them for any other purpose -- for the purpose, say, of pushing the economic story one's trying to sell -- is quite another.
It's actually pretty damn stupid.
The logic behind excluding items like food and energy when calculating a core price measure is perfectly sound: The prices of such goods swing wildly in response to sudden, temporary shocks, and they prove largely trendless as a consequence. To include them in a broad price-measure calculation would therefore produce a somewhat blurry picture in terms of what's going on with the prices of the other 78% of the goods and services in the consumer market basket.
And so, similarly, it's perfectly reasonable to exclude items like aircraft and vehicles, orders for which can (and do) swing from up 137% one month to down 33% the next, when calculating a core (so to speak) durables number.
But do, dear reader, keep two things in mind.
The first is this: Even though changes in food and energy prices are not included in the calculation of the core price measures, they still very much matter to everyone living in the real world. They are real prices, and consumers have to pay them in real dollars, and so they very much count.
And so, similarly, does the production of aircraft and vehicles.
Specifically, you can explain away durables strength to planes and cars and trucks until you're blue in the face, but it will never change the fact that an increase in the output of those items will show up in the next GDP report.
And that brings us to the second thing to keep in mind: A dollar is a dollar.
And more planes and trucks rolling off the assembly lines means more
money spilling into the economy.
And, because any business will accept dollars that stink even of
or octopus, that makes the economy go.