DURABLE GOODS ORDER EXPANSION SLOWS

FED CHAIRMAN'S TESTIMONY SPOOKS TRADERS

Today the Commerce Department's Bureau of the Census released its report on New Orders for Durable Goods for February. Today's report presents advance information on durable goods manufacturers' orders. Revised and more detailed estimates plus nondurable goods and inventory data will be published April 3rd.

Today's report showed that new orders for manufactured durable goods in February decreased $4.2 billion or 2.5 percent to $165.0 billion. This was the biggest decline since April 1995. This decline follows a 0.6 percent revised January decline and a 3.1 percent December increase and is the fourth decline in the last five months.

Month-to-month variations in the new orders data can be smoothed out if one takes a longer term view. When year-over-year changes in the new orders data are studied we find that orders have been expanding for the past three years. But, for the last 18 months, the annual rate of expansion has been slowing. During the past year and a half, the annual rate of expansion trended downward from a high of about 15 percent to a low of 1.03 percent in February. This was the lowest reading for this indicator since August of 1992.

Yesterday, at his Senate Banking Committee confirmation hearing, Fed Chairman Greenspan said, "The economy seems, at this particular state and in recent years, to be running at a reasonably good clip." Well, when he said this he couldn't have been thinking about the year-over-year behavior of the new orders for durable goods data. If the present trend continues, this indicator will soon be logging negative readings. And, when the FOMC decided to not lower interest rates yesterday morning, the members were obviously ignoring the opinion of the producers of durable goods. In a recent survey of members of the National Association of Manufacturers, more than three out of four of the firms polled wanted the Fed to lower interest rates again, and two out of three of those thought the cut should be at least 1/2 percent.

Chairman Greenspan was at it again this afternoon. This time the occasion was a hearing on the state of the economy conducted by the House Budget Committee. The following snippet from his testimony was blamed for a late afternoon rout that boosted the long bond rate from 6.57 to 6.67 percent and knocked about 44 points off the Dow, "... at some point, it may indeed already be occurring, where wages will start to rise again at a pace which would be consistent with profit margins declining..." Since this passage is out of context, I'm not certain what he was talking about. But, it seems that nervous bond and stock market traders wanted to believe that raging wage inflation was just around the corner.

I've been watching the wage situation ever since I started writing these daily articles, and, take it from me, there has been no sign of even a whiff of wage inflation in any of the government or private reports. In fact, over the past several years, wage increases have actually failed to keep up with modest rises in the cost of living index. Take a look back at the March 15 Economic Indicators article for more information on this subject.

Byline: Lafferty (MF Merlin)