Durable Good and Bad

Another Tale of Two Worlds

Our personal background expertise is exposed to the materials sector of manufacturing. We produce the tools and heavy duty machines for many industries all over the globe. In our parochial servicing of global demand we continue to see a recession tinged slowing of demand. Shrinking profit margins and rising employee terminations in our customer segments are signs that buyers have no room for normal capital expenditures. Yet our discussions with corporate leaders in other consumer oriented fields share that sales and profitability are exceeding expectations. Taking the economic pulse can be as diverse as the health of the doctors in contrast with the patients they treat.

Often reporters generalize, quoting statistics to fit the narrative they choose. The Job market: Very few jobs are being created each month. Lately that is true, but unemployment is low if you look at U3 (5%), although U6 is well over 9%. How about wage gains, corporate earnings, debt…?  As a friend used to say: Figures lie and liars figure! That is another way of saying, we can make data say whatever we want. Truth may be in the eye of the beholder and thus it’s relative to each of us. 

Take a look at the recent Durable Goods chart that measures expensive machinery and equipment lasting more than 3 years such as airplanes, large appliances, cars and drilling rigs.  Lately Durable Goods orders have been moderately weak, depending of course upon who you read.  Below we will take a quick run through The Good, the Bad & the Ugly.

Consumer durable goods orders have dropped recently, yet they remain within the noise level of normal short term volatility. No alarm bells here!

durable goods consumer 5-16

When we focus more upon cars and trucks the picture is actually exuberant. Overheating is the only worry here!

Durable goods transportation vehicles 5-16

Fracking, ocean drilling and the mining of metals may not be the majority of our personal business, but it would be hard to hide any negative exposure to the broad basic materials sector when you see order volumes falling to 30 year lows. The speed and severity of this 2014 – 2016 collapse rivals any recession in many decades. It’s a good thing there is not an economy wide recession of contracting GDP underway, as this could generate a systemic panic globally. This chart is clearly – Bad!

Durable really bad 5-16

The key short term metric to watch has been and continues to be OIL.  The $80 price drop over 18 months from the 2014 peak has taken a slow growth economy to the brink of a recession recently with just 0.5% GDP growth in the first quarter. Seasonal Oil price weakness before the end of this summer may cause escalating fears that are worth monitoring as energy peaks in coming weeks.

Oil May 2016

Fortunately, the years of central bank stimulus has reduced the debt service ratio to record lows and supported the much larger service sector jobs that have pushed consumer purchases of cars and appliances to high rates of consumption. To some degree this has counterbalanced the depressing oversupply pervasive in the commoditized industrial sector.  In our own manufacturing business niche we are seeing quote volumes beginning to rise and low but stable demand for consumables. Our belief is that, if commodity prices can maintain their current rebound pricing levels (or better), then the spindles will spin fast enough to turn heavy duty machine orders from a severe downtrend to a mild uptrend.  Our February Exec Spec forecasted a rally in Oil from the mid 20’s to about $50 this summer. In order to return to the sluggish “new normal” of 2% GDP, we need the  January 20th low at $26/barrel to avoid retesting or else a broad recession will be the topic at hand.

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