In the ongoing rise of evidence that the current economic environment may have reached a stimulus fueled cyclical peak – the index of new orders for durable goods released this morning placed another nail in the economic growth story. From the release:
“Durables orders fell back in April as overall new factory orders for durables declined 3.6 percent, following a revised 4.4 percent jump in March (previously estimated at up 4.1 percent). April’s decrease was worse than the median forecast for a 3.0 percent fall. Excluding transportation, new orders slipped 1.5 percent, following a 2.5 percent rise in March. Weakness in the latest month was broad-based.”
What is interesting is that a bulk of the weakness in the latest month was led by transportation equipment which dropped 9.5 percent in April after a 10.3 percent boost the month before. The auto industry apparently has been harder hit than initially believed by parts shortages due to the earthquake and tsunami in Japan which we said would most likely be the case.
Outside of transportation, weakness was widespread. Declines were seen in primary metals, down 1.6 percent; fabricated metals, down 1.1 percent; machinery, down 3.4 percent; electrical equipment, down 4.9 percent; and “other” durables, down 1.0 percent. Furthermore, business investment in equipment also declined with nondefense capital goods orders excluding aircraft falling 2.6 percent and shipments for this slipping 1.7 percent,
With the latest durables report disappointing and continuing to confirm the recent peak in this economic cycle, as shown in the chart, it also corresponds to the weakness that we have seen showing up in the Streettalk/Mauldin Economic Output Index. All of this information points to a weaker GDP number in the coming quarter and without another round of QE 3 coming in fairly short order we will most likely be looking for somewhere closer to 1-1.5% GDP growth in the 2nd quarter versus 3% that is currently expected. In other words, QE 3 will most likely arrive close to the end of summer.