Money and Markets: Investing Insights

How Healthy IS Our Economy? Durable Goods Orders a Worrisome Sign

Mike Larson | Thursday, January 28, 2016 at 4:22 pm

Market Roundup Dow 16,069.64 (+125.18) S&P 1,893.36 (+10.41) NASDAQ 4,506.68 (+38.51) 10-YR Yield 1.99% (-0.02) Gold $1,114.30 (-$1.50) Oil $33.65 (+$1.35)

Just how healthy IS the U.S. economy? Some officials and economists, including those at the Federal Reserve, point to relatively healthy job growth as an indicator of strength. That’s why Janet Yellen & Co. chose to stand rather than panic yesterday, and left the door open to future rate hikes despite recent market turmoil.

Others take a completely opposite tack, saying the risk of recession is rising fast. The junk bond market is signaling a greater than 40% chance of a contraction, according to a recent Bloomberg story. Some Wall Street economists peg the risk at a still-elevated, but less-certain 20%.
That’s where today’s durable goods figures come in. They weren’t just weak. They were putrid. Overall orders plunged 5.1% in December, the most in 16 months and far worse than the 0.7% decline predicted by economists.

Orders for durable goods tanked in December.

A key measure of core business spending — non-defense capital goods orders ex-aircraft — tanked 4.3%. Economists were looking for a drop of only 0.2%. The year-over-year decline was the worst going all the way back to 2009, when the economy was last emerging from recession.
The blame lies with a number of factors — the strong dollar, weak overseas demand for U.S. goods, the meltdown in energy spending, soaring inventories that need to be whittled down, and more. But the result is clear: Economic growth estimates are falling fast.
As a matter of fact, the “GDPNow” model put together by the Atlanta Fed is now estimating fourth-quarter growth of only 1%. That’s far below the mid-2% range expected as recently as November. Some economists warned after today’s numbers came out that the U.S. might not have grown at all in late 2015.

“Some economists warned that the U.S. might not have grown at all in late 2015.”

Personally, I think this is just the latest worrisome signal in a long list of them. It doesn’t bode well for large manufacturing firms, nor does it suggest corporate executives are confident in future growth. So keep that in mind when deciding whether to ramp up … or dial back … the risk level in your own portfolio. You know which approach I advocate.
Now, it’s your turn to weigh in. Are you worried about the signal from this durable goods report? Or are you encouraged by the recent jobs figures? Do you think we can ride out a manufacturing downturn thanks to strength in services and other sectors of our economy? Or are we tumbling toward recession? Let me hear about it in the comment section below.

Our Readers Speak

The latest, greatest Federal Reserve meeting is now behind us — but you had plenty of important things to say about Janet Yellen’s comments yesterday, as well as the Fed’s impact on markets overall.
Reader Frebon said: “It seems that ‘Don’t fight the Fed’ has no merit anymore. They seem clueless and don’t have any more bullets in their arsenal. That goes for Europe as well. It seems we are on a slippery slope, and perhaps the only way out is for the central banks to get out of the way and let rates normalize so Capitalism can prevail.”
Reader Gordon added: “The thing that really surprised me in the latest Fedspeak is that the Fed made no effort to ‘talk down’ the strong dollar. She is still enticing rich people from other countries to buy the dollar or export them into the U.S.
“Does she think the inflow of foreign money into dollars or American stocks will maybe prop up a sick stock market due to poor earnings by American companies, and also stuff some of the financial holes in the Good Ship America? By sucking up so much foreign currency into the U.S., it destabilizes other countries — but then we now live in a global community where in reality, it’s still every country for itself.”
Reader D.D. said: “It’s simply absurd that the Fed needs to constantly monitor markets because of a 25-basis-point increase. If our economy can’t sustain because of nonexistent rates, we are in huge trouble. Fact is, the Fed created massive dislocations of capital over the past six years, and now they have live with rebalancing volatility.”
When it comes to the Fed influencing (or not being able to influence) the economy, Reader Greg S. said: “In my Ph.D. program, I was taught about Phillips IS-LM curves. Monetary policy can’t stimulate an economy, so even this pearl of wisdom from politicians is a lie. Janet is shooting blanks. The best the Fed can do won’t help now.”
And finally, Reader J.L. offered this warning — Fed or no Fed: “World economies have never had more debts than right now in their entire histories. That can’t possibly be good. Governments can kick the can down the road only so far. At some point, the stuff will hit the proverbial fan. I believe that time is approaching, though I hope I am wrong.”
I appreciate all the comments. My firm belief is that central banks have lost control of asset prices because investors now have solid, concrete proof that QE, negative interest rates, and other CB policies don’t work. If they were effective in fighting off the global economic downturn, we wouldn’t need more and more rounds of them every few months.
Now, we’re also getting more and more evidence the U.S. economy is catching the global flu. That’s a recipe for stock market pain, and a key reason why I continue to recommend a very cautious investing approach.

Other Developments of the Day

Will Apple (AAPL) be forced to go “down market” in a bid to recharge smartphone growth? That’s the focus of this Wall Street Journal story, which discusses the benefits and drawbacks of that approach. The company has long been known for focusing only on the high end of the market. Its iPhones sold for an average price of $691 in the most recent quarter.
Facebook (FB) investors sure “liked” what they heard from the company late yesterday. The social-networking firm’s fourth-quarter earnings surged to $1.56 billion, or 79 cents per share excluding items. That handily beat estimates of 68 cents, as did sales of $5.84 billion.
Marketers are spending like mad to get in front of customers using mobile devices to access Facebook and Instagram. The company is also pushing more aggressively overseas.
I continue to read stories with vague rumors that OPEC and non-OPEC nations will get together, sing “Kumbaya,” and cut oil production to prop up prices. Oil prices staged a rally earlier today on the back of those rumors.
But the New York Times had a lengthy piece today about the Saudi strategy, and suggested the Middle-Eastern nation has no plans to cut production because it would end up just ceding market share to other countries. So be careful chasing bounces here.
The Bank of Japan will be the last major world central bank to weigh in on policy plans tomorrow. It’s unclear if it will launch even more QE, or start buying new kinds of assets — even though none of the past rounds has accomplished anything useful.
But one major threat to the “Abenomics” policies in Japan emerged overnight. Economy minister Akira Amari resigned amid allegations that he accepted bribes, potentially putting more pressure on Prime Minister Shinzo Abe’s regime and reform plans.
So what do you think of Facebook’s strong results, or a possible move by Apple to produce lower-end phones? How about Saudi Arabia’s ongoing resistance to production cuts? And do you think the BOJ will have any more success than the European Central Bank or U.S. Federal Reserve in propping up markets or the economy with QE? Share your thoughts below.
Until next time,
Mike Larson

Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.

The investment strategy and opinions expressed in this article are those of the author and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.