U.S. Durable Goods Orders Lowest Since 2005

October new orders for durable goods collapsed 6.2% m/m in what was the third consecutive monthly drop. During that period new orders virtually dried up as their 11.5% cumulative decline was the largest since the "credit crunch" recession of 1980. Moreover, the level of new orders for durables last month was the lowest since April of 2005. The latest decline followed a revised 0.2% September downtick and a similar 5.5% August collapse. October's drop was roughly double the Consensus expectation for a 2.6% shortfall.

An 11.1% m/m decline in transportation sector orders (-21.6% y/y) led the drop in total durable goods orders last month. Orders for motor vehicles (-23.1% y/y) and for aircraft (-18.1% y/y) both fell sharply.

The industry detail further highlights the recent severe weakness in bookings. Orders for primary metals orders fell 12.6% last month and they're down 29.2% just since July. Machinery orders fell 6.8% last month and they are off 13.0% over the last three periods while October electrical equipment bookings fell 5.3%, off 9.4% during the last three months.

New orders for computers & electronic products also have fallen, but the decline has been not as severe. This total fell 2.4% last month and by 3.5% during the last three. Orders for just computers & related products were quite weak and posted a 5.5% October drop, off 7.2% since July. New orders for communications equipment, however, rose 7.7% last month though that just made up for earlier weakness and they're off 5.0% since July.

The capital equipment sector has shown severe weakness. Orders for nondefense capital goods fell by 3.6% last month and they were off by 12.0% since July. Without aircraft, orders were about as weak as the total and they fell 4.0% last month, off by 9.3% during the last three months. This was the sharpest negative growth since the 2001 recession. During the last ten years there has been an 80% correlation between the y/y gain in nondefense capital goods orders and the rise in equipment & software spending in the GDP accounts. The correlation of the GDP figure with capital goods shipments is, as one would expect, a larger 92%.

Reflecting past weakness in new orders, overall shipments of durable goods fell 2.4%. Their decline during the last three months totaled 6.7% after a 0.1% uptick last year. For comparison, industrial production of durable goods during the last three months fell 6.2%. During the last ten years there has been a 69% correlation between the three-month change in shipments of durable goods and the change in durables industrial production. Less transportation, shipments of durable goods fell 1.7% last month and by 5.4% during the last three months.

Accumulation of inventories of manufactured products has yet to respond to a weaker shipments' growth environment. Inventories of manufactured durables rose 0.4% in October after a 0.2% September increase. The latest gains left three-month growth at 1.5%; hardly a strong rate of increase. In fact it was lower than the recent high of 2.6%. Still, it clearly is too fast for an environment when shipments over the last three months have fallen 6.7%. Tight inventory management techniques today are fostering a fast reaction to changes in the demand environment. Or maybe not. The ratio of inventories-to-shipments rose last month to its highest level since 1996. Clearly, an unwinding of this unwanted inventory buildup has yet to provide downward pressure on factory output.

Monetary Policy and Asset Prices from the Federal Reserve Bank of San Francisco is available here.

The Chicago Purchasing Manager's Association indicated that its November business barometer fell to 33.8 after the collapse during October. The latest figure was the lowest since early during the sharp recession of 1982. Consensus expectations had been for a reading of 37.3.

During the last ten years there has been a 67% correlation between the business barometer and the three-month change in US factory sector industrial production. There has been an 85% correlation between the Chicago figure and the national ISM index (due for release tomorrow) and that is the highest correlation of all the regional series with the national ISM index.

The new orders sub-index fell to 27.2, the lowest since 1980, and the index level is off by roughly one-half during just the last two months. Order backlogs also fell sharply. The production series ticked slightly after having more-than halved during October.

The employment index, at 33.4, was near its lowest level since the last recession. During the last thirty years there has been a 72% correlation between the level of the employment index and the three-month change in nonfarm payrolls. 1

The prices paid index fell further after having declined sharply during October. The current index level of 50.7 is nearly half the July high. During the last ten years there has been a 55% correlation between the price index and the three-month change in the finished goods PPI.

The Mortgage Meltdown, Financial Markets, and the Economy from the Federal Reserve Bank of San Francisco can be found here.

The Euro Area reported a dramatically deflated CPI (HICP, Harmonized index of consumer prices) for November. The index dropped its rate of inflation back to 2.1% from 3.2%, a huge deceleration (in one month!) for yr/yr inflation that owes to the plunge in world oil and energy prices. With a self-imposed limit for headline consumer inflation of 2% the ECB can now feel it is no longer in violation of the spirit of its ‘guideline’. And with inflation falling so sharply a forward-looking expectation of being inside the target would be prudent and reasonable.

Core inflation in the EMU is still not available. But the history shows that that measure has been much better corralled overall. Through October the three-month pace for core inflation was 2.4% compared to 2.4% for Yr/Yr core inflation.

Of course the ECB has long since jettisoned any such technical concerns of being in violation of its ceiling, as it has joined other central banks in a round of international rate-cutting. The ECB recognizes the downside risks but still has had this issue with the inflation rate being so far over its ceiling. The drop in the rate this month may be all the more important as the Federal Reserve in the US is pulling out even more stops to lend to banks and issue liquidity as well as to target mortgage rate reductions with a panoply of moves that have some Fed critics warning of inflation consequences even as the economy faces what could be a quarter of -5% real growth (annualized).

In such an environment the ECB at least has the comfort of getting its inflation rate back close enough to target range that it can again feel that it is making policy with some degree of comfort, prudence and discretion.

Still, there should be no sense that all is well. The drop in headline inflation merely gives the ECB its appearance of propriety back - not its ‘Mo-Jo.’ The Federal Reserve in the US has made the most moves of any central bank but part of its mix of policies has been to provide swap facilities for dollars to aid central banks abroad. Central banks are still ‘riding the tiger’. About a week ago US Treasury Secretary Paulson dared to commit the ‘in-crisis’ error of saying that banks had been stabilized, only to find that that they had not as Citigroup saw its stock drop and a new special action by the Fed/treasury was required. Clearly the financial situation remains fragile though it appears to be less degenerative than it was. Now policymakers are turning attention more to the economy. At a time like this with Europe looking weaker and the German economy set to import a good deal of weakness from trade as its exports drop, the ECB can use an extra-measure of flexibility. It is hard to say that this drop in inflation came ‘just in time’ but at least we can say ‘better late than never’.