Two Weak Spots in Economy
Show Strength at End of 2006
Durable-Goods Orders Climb;
Monthly New-Home Sales Rise
By JEFF BATER
January 26, 2007
WASHINGTON -- Two sore spots in the U.S. economy showed some strength at the end of 2006, with demand rising for expensive manufactured goods and new homes.
Durable-goods orders climbed 3.1% during December in a broad-based increase that included a 2.4% rise in bookings for nondefense capital goods excluding aircraft, the Commerce Department said Friday.
A separate government report showed sales of new homes went up a second straight month, rising 4.8% -- a positive ending to a troubling year that saw demand take its biggest spill since 1990.
"The economy, after a brief respite last year, appears re-energized and eager to accelerate," said Bernard Baumohl, managing director of The Economic Outlook Group. "As a result, we expect to hear a more hawkish tone from the Fed when it meets next week. This places the equity and fixed-income markets in a vulnerable position for the next few weeks."
The Federal Reserve will hold a two-day meeting on interest rates. It has held rates steady since August as the economy weakened and inflation turned milder. (See related article3.)
One bugaboo for the economy has been manufacturing. Friday's durables data was another sign things weren't so bad.
"The 3.1% increase in new orders for durable goods and 2.4% increase in non-defense capital goods, excluding aircraft, in December is a positive sign that the manufacturing slump is a pause, not a recession, and is starting to turning around," said Daniel J. Meckstroth, chief economist for the Manufacturers Alliance/MAPI trade group.
Transportation orders surged 4.8%, including the biggest climb in motor vehicle bookings since August 2004. Demand increased 2.5% for fabricated metals, 4.5% for primary metals, 5% for machinery, and 1% for computers and electronics. Demand decreased 1.4% for electrical equipment.
"It looks like the manufacturing side of the economy is holding its own," A.G. Edwards & Sons chief economist Gary Thayer said. "It's not as robust as it was previously, but there's still some signs of life."
The manufacturing sector weakened in the second half of 2006 because inventories started to back up too much as the economy slowed, leading to cuts in production. Declining car sales, for example, caused a contraction in output.
Recent signs of resilience, however, have emerged. The Institute for Supply Management's index of manufacturing activity moved to 51.4 during December from 49.5 in November. Readings above 50 point to expansion in activity; below 50 suggests contraction. Federal Reserve data on industrial production in December showed a 0.7% gain in manufacturing output, the largest increase since June. Manufacturing makes up 80% of all U.S. industrial production.
"It's still a little early to say manufacturing is out of the woods," Mr. Thayer said. "Durables is a volatile report. What we need is a string of good numbers."
While up in December, the yardstick for business spending -- nondefense capital goods excluding aircraft -- dropped by 1% in November and 4% in October. "Broadly speaking, this lead indicator of capital goods spending does not point to unusual strength in business equipment spending," Goldman Sachs said in a research note.
The Commerce Department reported new-home sales finished 2006 on a positive note, increasing 4.8% to a seasonally adjusted annual rate of 1.120 million. November sales rose 7.4%. Mortgage rates have been drifting lower and homebuilders are offering incentives to entice buyers.
On a not seasonally adjusted basis, new-home sales fell 17.3% in 2006 to an estimated level of 1.061 million, the largest drop since 17.8% in 1990.
The housing sector has restrained economic growth, which slowed in the third quarter to a 2.0% pace. The housing component of gross domestic product plummeted by 18.7%, which was the sharpest drop in 15 years and robbed GDP of 1.20 percentage points.
"While the back-to-back gains in new home sales are a positive development, it may be too early to conclude that the housing market has decisively turned the corner," said Brian Bethune, an economist for Global Insight. "Builders are still complaining about very high cancellation rates, indicating that final demand for new homes is much less robust than the headline numbers would suggest."
Show Strength at End of 2006
Durable-Goods Orders Climb;
Monthly New-Home Sales Rise
By JEFF BATER
January 26, 2007
WASHINGTON -- Two sore spots in the U.S. economy showed some strength at the end of 2006, with demand rising for expensive manufactured goods and new homes.
Durable-goods orders climbed 3.1% during December in a broad-based increase that included a 2.4% rise in bookings for nondefense capital goods excluding aircraft, the Commerce Department said Friday.
A separate government report showed sales of new homes went up a second straight month, rising 4.8% -- a positive ending to a troubling year that saw demand take its biggest spill since 1990.
"The economy, after a brief respite last year, appears re-energized and eager to accelerate," said Bernard Baumohl, managing director of The Economic Outlook Group. "As a result, we expect to hear a more hawkish tone from the Fed when it meets next week. This places the equity and fixed-income markets in a vulnerable position for the next few weeks."
The Federal Reserve will hold a two-day meeting on interest rates. It has held rates steady since August as the economy weakened and inflation turned milder. (See related article3.)
One bugaboo for the economy has been manufacturing. Friday's durables data was another sign things weren't so bad.
"The 3.1% increase in new orders for durable goods and 2.4% increase in non-defense capital goods, excluding aircraft, in December is a positive sign that the manufacturing slump is a pause, not a recession, and is starting to turning around," said Daniel J. Meckstroth, chief economist for the Manufacturers Alliance/MAPI trade group.
Transportation orders surged 4.8%, including the biggest climb in motor vehicle bookings since August 2004. Demand increased 2.5% for fabricated metals, 4.5% for primary metals, 5% for machinery, and 1% for computers and electronics. Demand decreased 1.4% for electrical equipment.
"It looks like the manufacturing side of the economy is holding its own," A.G. Edwards & Sons chief economist Gary Thayer said. "It's not as robust as it was previously, but there's still some signs of life."
The manufacturing sector weakened in the second half of 2006 because inventories started to back up too much as the economy slowed, leading to cuts in production. Declining car sales, for example, caused a contraction in output.
Recent signs of resilience, however, have emerged. The Institute for Supply Management's index of manufacturing activity moved to 51.4 during December from 49.5 in November. Readings above 50 point to expansion in activity; below 50 suggests contraction. Federal Reserve data on industrial production in December showed a 0.7% gain in manufacturing output, the largest increase since June. Manufacturing makes up 80% of all U.S. industrial production.
"It's still a little early to say manufacturing is out of the woods," Mr. Thayer said. "Durables is a volatile report. What we need is a string of good numbers."
While up in December, the yardstick for business spending -- nondefense capital goods excluding aircraft -- dropped by 1% in November and 4% in October. "Broadly speaking, this lead indicator of capital goods spending does not point to unusual strength in business equipment spending," Goldman Sachs said in a research note.
The Commerce Department reported new-home sales finished 2006 on a positive note, increasing 4.8% to a seasonally adjusted annual rate of 1.120 million. November sales rose 7.4%. Mortgage rates have been drifting lower and homebuilders are offering incentives to entice buyers.
On a not seasonally adjusted basis, new-home sales fell 17.3% in 2006 to an estimated level of 1.061 million, the largest drop since 17.8% in 1990.
The housing sector has restrained economic growth, which slowed in the third quarter to a 2.0% pace. The housing component of gross domestic product plummeted by 18.7%, which was the sharpest drop in 15 years and robbed GDP of 1.20 percentage points.
"While the back-to-back gains in new home sales are a positive development, it may be too early to conclude that the housing market has decisively turned the corner," said Brian Bethune, an economist for Global Insight. "Builders are still complaining about very high cancellation rates, indicating that final demand for new homes is much less robust than the headline numbers would suggest."
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