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July Durable Goods Orders

Businesses are investing heavily again and while the equity market chaos may cause a pause, the underlying economy remains very solid.


Key Data: Orders: +2%; Excluding Aircraft: +3%; Private Capital Spending: +2.2%; Backlogs: +0.2%

In a Nutshell: ³Businesses are investing heavily again and while the equity market chaos may cause a pause, the underlying economy remains very solid.2

What it Means: While all eyes are focused on the equity markets, the economy just keeps keeping on. The data for July have been almost universally good and that was seen again with the release of the durable goods report. Spending on big-ticket items was up well above expectations and this was the second consecutive large rise in orders. Importantly, demand spiked despite sharp cut backs in both civilian and defense aircraft orders. The strongest gain was in vehicles and assembly rates, which were up strongly in July, should stay high. I separate motor vehicles from aircraft since we get a short-term reaction when vehicle sales rise, but when aircraft companies receive big orders, it could take years before output and hiring changes. There were also solid increases in orders for machinery, communications equipment and electrical equipment. There was some pull back in metals and computers, but the computer slowing occurred after a double-digit rise in June. This sector has become as volatile as aircraft! But what really made this report so positive was a second consecutive increase in capital spending that excludes defense and aircraft. This is a proxy for business investment and it looks like the frump that firms had been in is behind us. With backlogs building and orders strong, it looks like manufacturing production should be strong this quarter.

Markets and Fed Policy Implications: I will admit that I am frustrated about the arguments that because of the market volatility, the Fed shouldn¹t do anything until, well, who knows when. For months I have argued that investors were taking the ³I will believe it when I see it² approach to a Fed tightening and the FOMC shouldn¹t make policy based on faulty investor thinking. Now that the market charts looks like the Wild Mouse ride, everyone is saying the Fed cannot tighten in order to save the bacon of the illogical investor. Ugh! Yes, China is an issue, but everyone knew the Chinese economy was slowing; we just didn¹t know by how much. Unfortunately, we still don¹t. Regardless, we don¹t export much to China. In 2014, exports totaled less than $124 billion, about 7.5% of all exports and only 0.7% of GDP.. So far this year they are down 4.5%. So, what would a major slowdown in China mean for the U.S.? Directly, not much. If it harms the rest of Asia and Europe, there could be a larger impact, but barring a major calamity, the effects will not be enough to derail the expansion. But a Chinese slowdown could hurt earnings of companies that operate in there. That would affect stock prices. So, cycling back to the Fed, should Fed policy be based on stock prices of companies doing business outside the U.S.? Is it the Fed¹s job to support these companies? Really? Basically, unless China is melting down (a new China Syndrome?) and the markets follow, the Fed should continue on the path that it was on, and that was to raise rates in September. If the equity market volatility and uncertainty about Chinese growth are concerns, then wait until October to see if conditions settle down. Forget the absurdity that the Janet Yellen needs a scheduled press conference to take the action it should take. Schedule a conference call and hike rates in October. I still think the Fed should raise rates in September.


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