Investment Contrarians

What’s Really Driving the Latest Economic Report?

By for Investment Contrarians |

Latest Economic ReportThe latest data regarding the economic growth rate of America came from the Commerce Department’s durable goods report, and the headline numbers weren’t good. The total orders for durable goods in the month of August fell 13%, primarily due to a massive drop in civilian aircraft.

This report, however, was not a surprise. While it may be a hit to investor confidence, the truth is that economic growth has been slowing and we’ve been aware of this from the numerous comments made by a large numbers of CEOs in interviews. The main concern is the “fiscal cliff.” The more people talk about the fiscal cliff and the more inaction by Congress, the less likely it is that businesses will expand. Would you increase your capital expenditures not knowing what will happen in just a few months? I certainly wouldn’t. This uncertainty is what’s really holding back jobs growth.

The economic growth forecast for next year without a deal to avert the fiscal cliff is bleak for America. Under such a scenario, jobs growth will continue to lag, as businesses have to adjust their projections of what is attainable with declining economic growth downward. A lack of economic growth will trickle down and affect many businesses. The continued lack of progress by Congress is clearly hurting the economy, and it has been for the last couple of months. As long as there is no deal in sight, I believe that we will continue to see worse economic data and a continued lack of jobs growth.

The largest impact on the durable goods number in August came from The Boeing Company (NYSE/BA), as it saw orders decline from 260 in July down to only one in August. New orders for non-defense capital goods, excluding aircraft, were up 1.1%, as compared to a decline of over five percent the previous month. Obviously, large products such as planes need strong economic growth for new orders to continue to grow. We see small gains in the rest of the economy in many other sectors, as businesses continue to run their businesses at status quo but are refusing to massively expand because of concerns regarding fiscal policy in 2013.

The durable goods number is notoriously volatile month-to-month. To get a better perspective, one should look at the yearly numbers. New orders for durable goods are up 5.5% year-to-date. Excluding defense, new orders are up 6.7% and shipments are up nine percent year-to-date.

What this tells you is that the underlying economy is weak but not dead. With the overhang of the fiscal situation constantly being reiterated by business owners as a concern for 2013, we will continue to see a lack of economic growth and jobs growth until the situation is rectified. However, the one positive way to look at the situation is that if the fiscal cliff is averted, we should see a lot of pent-up business demand and capital expenditures start to feed into the overall economic growth for the country.

I believe once the election is over, we should see a fiscal solution announced that should alleviate many concerns and allow for decent economic growth in 2013. This will then result in jobs growth, which always lags economic growth. However, it is always dangerous to bet on Congress getting its act together. If a deal does not come to fruition, economic growth will plunge next year.

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