U.S. Durable Goods Orders Post Surprising Decline

New single family home sales fell 1.8% during February to 590,000 after a 1.6% January decline that was slightly less than reported initially. The decline dropped sales to the lowest level since 1995 and they were down 57.5% since the peak in July of 2005. A sales rate of 576,000 was the Consensus expectation for sales last month.

By region, sales in the Northeast were by far the weakest last month and dropped 40.3% (-19.6% y/y). Sales in the Midwest also continued quite weak and fell 6.4% during February (-42.5% y/y).

In the West sales added a slight 0.7% (-28.3% y/y) to the 5.0% January increase while sales in the South recovered all of the January decline and rose 5.7% (-27.9% y/y).

The median price for a new single family home rose a firm 8.2% to $244,100 after a 0.2% January downtick. Prices were down 7.0% from the early 2007 peak. That was much less of a decline point to point reported last month due to the February rise and upward revisions.

The number of new homes for sale fell 2.1% last month, continuing a recent decline. Since the July '06 peak the number of new homes on the market was down 17.8%.

Continuing the recent trend, the decline in the inventory of homes for sale did not keep pace with the weakness in home sales. At the current low sales rate, the 9.8 months' supply of homes on the market was more than double the rate for all of 2005 and it was the highest since 1981.

It may not be resiliency as much as volatility as the rise in January EMU orders still shows growth rates steadily declining from 12 months to 6 months to 3 months. In the current quarter despite the bump up in January orders are only rising at a 1.2% annual rate over Q4. Still, other more ‘timely’ data tell a better resiliency story.

Total domestic orders show the same steady deceleration in orders as overall orders with the recent three-month order growth rate at a -3.7$ saar. Foreign MFG orders do not show the clear slowdown of overall orders, but that is a bit of nitpicking since the 6-month growth rate is about the same as the 12-month pace and the recent 3-month growth rate is about half of those rates at 5.5%. The Euro Area does seem to be slowing domestically and, despite the strength of the euro, foreign growth is keeping the EMU stronger.

Germany and Italy show withering order trends. France is consistent with a slowdown. Only the UK is different on a jump in orders in January that has sent the three-month growth rate soaring.

On balance though, the ECB and EU Commission seem still very worried about the level of the euro. But the German IFO index has risen again in March and the new Belgian Bank index for March also has shown growth for the second month running. This domestic resilience was not expected.

Data and Policy Conundrums… The orders data tell us that domestic orders are in a slowing pattern. The strength has come from orders outside the EMU. Now some new measures are showing that there may be some domestic resiliency in February and March in Germany and Belgium. None of this will make the ECB ready to reverse its course and cut rates anytime soon. It makes you wonder if the euro really does have more upside, something I have been unwilling to ponder up to now. Is Europe swallowing its teeth to hide the euro’s damage to its economy? Or is Europe really this resilient? If Europe is this resilient, the ECB’s carping about inflation risk makes sense, but complaining about ‘euro strength and excessive FX volatility’ does not make sense. Which is it?

The IFO headline index rose to 104.08 in March from 103.1 in February. This rise marks the third straight increase from a low of 103 in December 2007. It comes at a time that the euro is moving relentlessly higher and policymakers are complaining about that. The quick rebound in the IFO index and apparent health it signals sires questions about the rest of Europe.

Germany’s current situation is improving for the second month in a row with the index up to 111.5 from 110.3 in February. Expectations also notched higher, rising for the second time in four months. Expectations are having a bit of a harder time of it. The expectations index edged higher to 98.4 in March from 98.2 in February

Germany’s sectors look fairy solid as the IFO diffusion gauges show in the table below. Construction is the weakest sector and it is in the 56^th percentile of its range of values since 1991. Manufacturing is still the strongest sector in the 84^th percentile of its range and services are strong in the 83^rd percentile of their range. Wholesaling and retailing are in the mid 75^th or so percentile of their respective ranges. This leaves Germany’s overall sector index in the 83^rd percentile, hardly a weak showing.

If Germany is this resilient, is the rest of EMU going to have more trouble? A strong Germany will tend to the keep the ECB tighter longer. But Italian data have been decidedly weak with orders fading and both consumer and business morale measures from ISAE on very weak trends. EMU countries share a common currency but national inflation rates have been quite different across EMU member countries ever since the currency union was formed; it may be that competitiveness levels in the EMUe are not on level playing field. That could cause a real policy-making dilemma and worse political trouble within the union.

Italy’s Business confidence gauge from ISAE edged lower in March to 89 from 89.6 in February. The pace of its decline, however, seems to have slowed (see the blue line in accompanying chart). Overall confidence is not in terrible shape as it stands in the 72^nd percentile of its range of values going back to 1991. But it has weakened and is weaker than it was.

Still, Italy shows the same malaise as most other European countries. It is the consumer sector that is weakest. The industry order gauge for consumer goods stands in the 15^th percentile of its range, the weakest of all sectors. Intermediate goods orders are in the 43rd percentile of their range and capital goods orders are in the 57^th percentile of their range. For all of industrial the sector order gauge stands in the 31^st percentile of its range.

For most sectors domestic and foreign orders are about the same in percentile terms. But for consumer goods, foreign orders are in the 31^st percentile of their range compared to a 13 percentile standing for domestic orders. The consumer goods production gauge is also the weakest among sectors standing in the 19^th percentile compared to 51^st percentile for capital goods and a 31^st percentile reading for intermediate goods.

In Italy capital goods are holding up while the consumer sector is under pressure led by weakness at home. While Italy’s business gauge has continued to drop the good news is that the pace of that drop has slowed.