Following the Weak Durable Goods Data, These Three Plays Look Good
If the stock market is only as strong as the companies that go into making up the index and their earnings are contingent upon consumer spending, then the durable goods numbers don’t really look all that great.
New orders for manufactured durable goods slipped by one percent, or $2.2 billion, to $225.0 billion—the third decrease in the last four months. Analysts had forecasted a January drop of 0.7%. The one-percent drop in January comes on the heels of a 5.3% decrease in December. (Source: “Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders January 2014,” United States Census Bureau web site, February 27, 2014.)
In January, shipments of manufactured durable goods, which have been down for two consecutive months, decreased $0.9 billion, or 0.4%, to $232.3 billion. This followed a 1.8% decrease in December.
Inventories—the number of products sitting on a shelf—increased by 0.3% ($1.0 billion) in January to $389.1 billion. This represents the highest level ever recorded and follows a 0.9% increase in December.
Non-defense orders for capital goods in January slipped by 3.9% ($3.2 billion) to $78.3 billion. Shipments decreased by one percent, or $0.8 billion, to $75.1 billion, while unfilled orders increased by 0.5%, or $3.2 billion, to $644.7 billion. Inventories increased $0.5 billion, or 0.3%, to $177.5 billion.
Even the less volatile core durable goods numbers fail to really impress. Orders for long-lasting U.S. durable manufactured goods, minus the more volatile transportation industry, climbed 1.1% in January, the biggest jump since May. This sort of balances out the higher-than-expected 1.9% drop in December. Analysts had forecasted a 0.1% decline in January core durable goods.
Still, the better-than-expected increase in factory activity is providing investors with a little hope that economic activity is picking up. While surprises to the upside are always encouraging, the most optimistic bull has to be a little cautious about the underlying economic numbers.
Most recently, the number of Americans filing new jobless claims for unemployment benefits rose unexpectedly to 348,000 for the week ended February 22, from 334,000 in the week ended February 15. Analysts had expected the number of unemployment claims to improve to 330,000. (Source: “Unemployment Insurance Weekly Claims Report,” United States Department of Labor web site, February 27, 2014.)
So what do all these numbers mean? They show that a lot of inventory is sitting on shelves and companies aren’t reinvesting. And they aren’t reinvesting because jobs data is weak and wages are flat.
For an economy in which consumer spending accounts for almost 70% of gross domestic product (GDP), we need to see a strong boost in hiring and wages. But with the recent durable goods data, it’s quite possible the U.S. government will even cut its GDP growth outlook.
But again, it’s all in how you interpret the data. For bears, weak durable goods numbers suggest some manufacturers will see a decrease in demand for their products. Bulls, on the other hand, will say the solid core durable goods data suggests business might pick up this spring.
No matter what side of the fence you stand on, the durable goods and core durable goods numbers point to some interesting opportunities. If you’re a bear, you might want to consider shorting companies like Caterpillar Inc. (NYSE/CAT), Whirlpool Corporation (NYSE/WHR), or Deere & Company (NYSE/DE). Bulls, on the other hand, might want to consider adding companies like these to their retirement portfolio.