Manufacturing strength is focus of investors
Durable-goods data to yield more clues; how are consumers feeling?
By Jeffry Bartash, MarketWatch
WASHINGTON (MarketWatch) — If the smoldering U.S. economy is going to catch fire, the manufacturing sector is probably going to have to provide the spark.
More than a year after the last recession ended, the economy still hasn’t seen that spark. Mediocre job growth and a high unemployment rate have kept consumer spending in check, and the caution of consumers has discouraged businesses from increasing investment. Yet one critical area of the economy that’s perking up is manufacturing. A number of economic indicators have shown steady improvement and the industry added 136,000 jobs last year — the first time manufacturing employment has increased since 1997.
MarketWatch consensus
| date | report | Consensus | previous |
|---|---|---|---|
| Feb. 22 | Consumer confidence | 65.0 | 65.6 |
| Feb. 23 | Existing home sales | 5.22 mln | 5.28 mln |
| Feb. 24 | Jobless claims | 403,000 | 410,000 |
| Feb. 24 | Durable goods orders | 2.5% | -2.3% |
| Feb. 24 | New home sales | 300,000 | 329,000 |
| Feb. 25 | GDP | 3.2% | 3.2% |
| Feb. 25 | Consumer sentiment | 75.4 | 75.1 |
“Durable goods is the key indicator next week,” said Kurt Karl, chief economist at Swiss Re. “Another month of good numbers would be a positive sign.”
Also on tap next week are indicators on consumer confidence, home sales and an updated report on U.S. economic growth in the fourth quarter.
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In January, for example, economists surveyed by MarketWatch project that strong airline orders boosted durable goods by a solid 2.5%, reversing December’s 2.3% decline.
While a good “headline” number can move markets, it’s not viewed as the most important piece of data in the durables report. Economists prefer to look instead at a category called core capital goods.
The core data strips out defense and airline orders because they can jump around month to month. Core data gives a clearer picture of what’s going on with the rest of the nation’s manufacturers whose sales are more evenly distributed.
Core capital orders were strong toward the end of 2010, climbing 3.1% in November and 1.4% in December. Yet the core number is expected to fall in January, perhaps sharply, as it usually does.
What gives? Well, companies often ramp up spending in December before the year runs out if they have any money left in their budgets. Once January rolls around, they’re still planning their capital budgets and they spend more slowly to begin a new fiscal year. More orders tend to be placed in February and March.
Improvements in orders historically tend to signal a strengthening economy. Manufacturers hire more workers, workers spend more money, consumer confidence grows and companies increase investing.
So far such a virtuous economic cycle has been absent during the current recovery, leaving the jobless rate above 9% and keeping consumers anxious.
Consumers and home sales
Consumers slowly seem to be growing more optimistic, however. Retail sales have risen seven straight months and the two widely followed consumer confidence surveys have been on an upward trend, with one hitting a three-year high.“Consumers are showing more confidence, at least in their spending habits,” Karl said. A surprisingly big increase in either report could give markets a boost.
Several monthly reports on new- and existing-home sales, meanwhile, haven’t had much impact on investors lately. The U.S. housing market remains depressed, and sales are near modern historic lows.
Economist Patrick Newport of IMS Global Insight say these reports are unlikely to excite investors until they start showing several months of improving sales — or a sudden upsurge.
“If you get a really big jump it might move markets,” he said. More likely, Newport added, is a gradual improvement in housing sales through 2011 as hiring increases and the unemployment rate falls.
Jeffry Bartash is a reporter for MarketWatch in Washington.
