September 27, 2012
The economic data released Thursday morning included a double dose of ugly. The Commerce Department said that gross domestic product grew at an annual rate of just 1.3 percent over the months of April, May and June, slower than the 1.7 percent reported last month.
On top of that, the Commerce Department supplied some bad news about the more recent past, reporting that orders for durable goods – long-lasting manufactured items such as aircraft, cars, and appliances – plunged by more than $30 billion, or 13.2 percent, in August. That’s the largest decrease since January 2009, when the economy was still officially mired in recession, and it’s much worse than the 5 percent drop economists had expected. The drop last month follows a 3.3 percent gain in July, revised lower from a previously reported 4.1 percent increase.
Together, the headline numbers could make for a 1-2 punch at a time when President Obama is still trying to make a case for his economic stewardship. But once you get past the scary headline numbers, the picture, while not encouraging, is nevertheless not quite as frightening.
In the new GDP estimate, consumer spending, exports and business investment were all revised lower. Still, half of the drop came as the result of the drought in the Midwest, the worst in half a century. Farm inventories accounted for the single largest revision, subtracting 0.2 percentage points from growth, according to Nigel Gault, chief U.S. economist at HIS Global Insight. “The drought will hurt GDP growth this year, but that effect will unwind in 2013, assuming better weather next year,” Gault wrote in a note to clients Thursday morning.
UBS economist Maury Harris expects the drought will have a slightly larger impact on the GDP numbers for the third and fourth quarter of 2012. “For next year, though, farm inventories should rebuild, with an equivalent positive impact on overall growth figures,” Harris wrote in a note Thursday.
As for the plunge in durable goods orders – a sign that the manufacturing rebound heralded by President Obama may be faltering – the 13.2 percent drop reflected particularly weak demand for aircraft and cars. While new orders for machinery, communications equipment, computers and electronic products all fell, orders for transportation equipment dropped dramatically, plunging by $27.8 billion, or 34.9 percent. New orders for nondefense aircraft and parts plummeted 101.8 percent. And with the fiscal cliff looming at the end of the year, including deep cuts to the defense budget, new orders for defense dropped 40.1 percent.
Economists warn against reading too much into the top-line 13.2 percent drop, though. “Just ignore the headline number,” says Paul Ashworth of Capital Economics. “It doesn’t mean really anything. Most of that has to do with aircraft orders, which are incredibly volatile.”
Boeing saw its orders tumble from 260 in July to just one in August. “When you order an airplane it’s not something you then expect to be delivered next month,” Ashworth says. “It’s something that will be delivered several years in the future. So aircraft orders tell you nothing about where the economy is going in the next, well, even six months.”
Even setting aside the volatile aircraft data, though, still leaves a fairly weak outlook for business investment. “Businesses appear to have pulled back on hiring and capex” – capital expenditures – “as the election and the scheduled fiscal contraction near,” Harris of UBS wrote.
Excluding transportation, new orders fell 1.6 percent after sliding 1.3 percent in July. Orders for nondefense capital goods excluding aircraft – a measure of business investment – actually rose 1.1 percent, the first increase since May but only partially making up for a 5.2 percent drop in July. But shipments of those goods, which go into tabulating the quarterly GDP figures, fell 0.9 percent. With second-quarter GDP coming in at 1.3 percent, there isn’t much here to suggest significant improvement.
The average annualized rate of capital goods orders over three months is down 17.8 percent, Bank of America Merrill Lynch economist Michelle Meyer wrote Thursday. "This is a sharp deceleration, highlighting a pullback in business investment," she wrote. "We believe the more recent contraction in capex reflects the uncertainty shock from the fiscal cliff. This should continue to weigh on business investment in coming months."
Meyer expects business investment to continue to contract through the end of the year and into 2013, and other economists agree the outlook for business investment is week. “We see a clear downward trend continuing in business capital demand,” IHS economist Paul Edelstein noted. “Businesses have become more pessimistic as we approach the fiscal cliff with no resolution in sight. But even if we avoid it, there is still China and Europe weighing on our export markets.”
So while the numbers might not be quite as bad as the headlines suggest, they’re still nothing to cheer about.