Big-ticket data add to worries - Durable goods orders fall short; Fed chief dims rate-cut hopes
Big-ticket data add to worries - Durable goods orders fall short; Fed chief dims rate-cut hopes
By James P. Miller
Copyright © 2007, Chicago Tribune
Published March 29, 2007
Orders for the big-ticket manufactured items known as durable goods fell significantly short of expectations last month, the Commerce Department said Wednesday in a report that increased investor worries about how long it will be before the underperforming U.S. economy can regain its earlier momentum.
The latest report offered confirmation that businesses are pulling back their spending in expectation of weak market conditions.
"Awful" was the term High Frequency Economics' Ian Shepherdson used to describe the latest durable goods report.
"Disappointing," said another economist.
"Not good," echoed a third.
To make matters worse, the disappointing report came out on the same day that Federal Reserve Chairman Ben Bernanke told a joint congressional panel that despite three consecutive quarters of subpar economic growth, the central bank still considers inflation to be the biggest threat facing the economy.
With that stance, Bernanke "appeared to slash hope that the Fed will lower interest rates any time soon," said A.G. Edwards stock market strategist Al Goldman.
Investors responded by sending the Dow Jones industrial average down nearly 100 points.
Overall, orders for durable goods rose 2.5 percent in February, below the 3.5 percent most economists had been expecting, but the biggest disappointment lay in what's known as the "ex-transport" figure.
Economists often prefer to eliminate the skewing effect caused by the routine swings in orders for commercial jets and automobiles by stripping out those sectors to obtain the ex-transport reading.
Experts had been anticipating that the ex-transport number would grow 1.8 percent in February, but instead it fell 0.1 percent.
The decline wasn't as bad as January's unnerving 4 percent fall, but it nonetheless suggested that the weakness in orders is settling in for what could be a lengthy stay.
Much of that shortfall was centered in capital goods products, such as computers and production machinery, which companies buy as an investment in future productivity. But evidence is growing that corporate executives are opting to stay on the sidelines rather than spend money on equipment.
The economy is generally considered to be performing above its long-term growth potential when it is growing by more than 3 percent a year. Growth has now been below potential for the past three quarters, as the Fed's rate hikes have chilled the economy.
The central bank raised its benchmark rate 17 straight times starting in June 2004 before pausing in August 2006.
Growth will likely remain below trend, at least for the first half of 2007, according to a number of observers.
Risks said to be higher
Wednesday's report "considerably raises the economic risks over the coming months," said Action Economics' Mike Englund.
The economist said he now expects the economy to grow at an annualized rate of only 1.6 percent in the first quarter and 2.8 percent in the second quarter.
In a reference to retired Fed Chairman Alan Greenspan's recent statement that there is a 1 in 3 chance the U.S. will slide into an economic recession this year, Nomura Securities economist David Resler said the slumping durable goods data mean "the possibility of recession by year-end looks somewhat less remote than when Mr. Greenspan first asserted such a risk a month ago."
Not every observer was downbeat.
Business spending will be a drag on first-quarter economic growth, predicted FirstTrust Advisors economist Brian Wesbury, but will then "accelerate and add to economic growth for the rest of 2007."
Others pointed out that the economy's current sluggishness is, after all, the desired effect of the Fed's earlier rate hikes.
"As corporate managers face the uncertainties of the economic slowdown, there is a chill going up and down their spines," acknowledged ClearView Economics economist Ken Mayland.
But, he added, "this is how a rising inflation trend is reversed."
To blunt the threat of inflation, he continued, "the economy must endure some pain" in the form of temporarily weakened performance.
Bernanke told Congress on Wednesday that he doesn't believe the economy will slip into a recession, rejecting the notion Greenspan raised that the economic expansion that started in late 2001 could be running out of steam.
"There seems to be a sense that expansions die of old age," the Fed chairman said. "I don't think the evidence supports that."
----------
jpmiller@tribune.com
By James P. Miller
Copyright © 2007, Chicago Tribune
Published March 29, 2007
Orders for the big-ticket manufactured items known as durable goods fell significantly short of expectations last month, the Commerce Department said Wednesday in a report that increased investor worries about how long it will be before the underperforming U.S. economy can regain its earlier momentum.
The latest report offered confirmation that businesses are pulling back their spending in expectation of weak market conditions.
"Awful" was the term High Frequency Economics' Ian Shepherdson used to describe the latest durable goods report.
"Disappointing," said another economist.
"Not good," echoed a third.
To make matters worse, the disappointing report came out on the same day that Federal Reserve Chairman Ben Bernanke told a joint congressional panel that despite three consecutive quarters of subpar economic growth, the central bank still considers inflation to be the biggest threat facing the economy.
With that stance, Bernanke "appeared to slash hope that the Fed will lower interest rates any time soon," said A.G. Edwards stock market strategist Al Goldman.
Investors responded by sending the Dow Jones industrial average down nearly 100 points.
Overall, orders for durable goods rose 2.5 percent in February, below the 3.5 percent most economists had been expecting, but the biggest disappointment lay in what's known as the "ex-transport" figure.
Economists often prefer to eliminate the skewing effect caused by the routine swings in orders for commercial jets and automobiles by stripping out those sectors to obtain the ex-transport reading.
Experts had been anticipating that the ex-transport number would grow 1.8 percent in February, but instead it fell 0.1 percent.
The decline wasn't as bad as January's unnerving 4 percent fall, but it nonetheless suggested that the weakness in orders is settling in for what could be a lengthy stay.
Much of that shortfall was centered in capital goods products, such as computers and production machinery, which companies buy as an investment in future productivity. But evidence is growing that corporate executives are opting to stay on the sidelines rather than spend money on equipment.
The economy is generally considered to be performing above its long-term growth potential when it is growing by more than 3 percent a year. Growth has now been below potential for the past three quarters, as the Fed's rate hikes have chilled the economy.
The central bank raised its benchmark rate 17 straight times starting in June 2004 before pausing in August 2006.
Growth will likely remain below trend, at least for the first half of 2007, according to a number of observers.
Risks said to be higher
Wednesday's report "considerably raises the economic risks over the coming months," said Action Economics' Mike Englund.
The economist said he now expects the economy to grow at an annualized rate of only 1.6 percent in the first quarter and 2.8 percent in the second quarter.
In a reference to retired Fed Chairman Alan Greenspan's recent statement that there is a 1 in 3 chance the U.S. will slide into an economic recession this year, Nomura Securities economist David Resler said the slumping durable goods data mean "the possibility of recession by year-end looks somewhat less remote than when Mr. Greenspan first asserted such a risk a month ago."
Not every observer was downbeat.
Business spending will be a drag on first-quarter economic growth, predicted FirstTrust Advisors economist Brian Wesbury, but will then "accelerate and add to economic growth for the rest of 2007."
Others pointed out that the economy's current sluggishness is, after all, the desired effect of the Fed's earlier rate hikes.
"As corporate managers face the uncertainties of the economic slowdown, there is a chill going up and down their spines," acknowledged ClearView Economics economist Ken Mayland.
But, he added, "this is how a rising inflation trend is reversed."
To blunt the threat of inflation, he continued, "the economy must endure some pain" in the form of temporarily weakened performance.
Bernanke told Congress on Wednesday that he doesn't believe the economy will slip into a recession, rejecting the notion Greenspan raised that the economic expansion that started in late 2001 could be running out of steam.
"There seems to be a sense that expansions die of old age," the Fed chairman said. "I don't think the evidence supports that."
----------
jpmiller@tribune.com
posted by Carlos T Mock @ 7:53 AM
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