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Economic Watch: Business Investment Increasing, Consumer Confidence Soars

September 28, 2016

By Evan Lockridge

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A preliminary report shows new orders and shipments for big-ticket manufactured durable goods lost steam in August. Inside the report, however, is some evidence that business investment for the long term is increasing.

Commerce Department figures show the level of new orders for items designed to last at least three years was nearly unchanged from the month before, following a downwardly revised 3.6% increase in July. The performance was better than a consensus estimate by analysts who were expecting a 1.5% drop.

Shipments of manufactured durable goods fell 0.4% in August from the month before, following two consecutively monthly gains, while the July performance was revised slightly lower. This most recent drop was led by a 1.1% drop in shipments of transportation equipment.

Compared to August 2015, new orders last month fell 0.6% while shipments declined by 0.9%.

New orders for non-defense capital goods excluding aircraft, an indicator of business investment, improved a surprising 0.6%, the third straight monthly improvement, while such shipments fell 0.4%. These new orders are down 4% from a year ago while shipments are 5.1% lower.

Weak business spending has been a major factor behind the economy’s subpar growth in recent years, according to the Wall Street Journal, and has been a mystery to economists. It reports, “Some of the weakness is tied to depressed energy prices, which have led to a decline in drilling and exploration, but other factors appear at play.”

Overall, manufacturing in the U.S. remains below where it was earlier in the current economic recovery, with the Institute for Supply Management reporting early this month the sector contracted in August following five consecutive months of expansion. However, a separate report from IHS Markit shows manufacturing is still expanding, but at a slower rate than it was in July. 

Consumer Confidence Highest Since 2007

This report on durable goods follows one showing consumers are feeling the best they have in this post-Great Recession economic expansion.

The Conference Board Consumer Confidence Index, which had increased in August, improved further in September. The Index now stands at 104.1, up from 101.8 in August. That's its best reading since August 2007 and compares to a recession low of 25.

The Present Situation Index rose from 125.3 to 128.5, while the Expectations Index improved from 86.1 last month to 87.8.

“Consumers’ assessment of present-day conditions improved, primarily the result of a more positive view of the labor market,” says Lynn Franco, director of economic indicators at The Conference Board. “Looking ahead, consumers are more upbeat about the short-term employment outlook, but somewhat neutral about business conditions and income prospects. Overall, consumers continue to rate current conditions favorably and foresee moderate economic expansion in the months ahead.” 

Consumers’ assessment of current conditions improved in September. Those stating business conditions are “good” decreased from 30.3% to 27.4%. Their appraisal of the labor market was more positive than last month. Those stating jobs were “plentiful” increased from 26.8% to 27.9%.

Consumers’ optimism regarding the short-term outlook was more favorable in September. However, the percentage of consumers expecting business conditions to improve over the next six months dropped from 17.6% to 16.5%.

The outlook for the labor market was more upbeat than in August. The proportion expecting more jobs in the months ahead increased from 14.4% to 15.1%, while those anticipating fewer jobs declined from 17.5% to 17%. The percentage of consumers expecting their incomes to increase fell from 18.5% to 17.1%. However, the proportion expecting a decline dropped from 11% to 10.3%.

New Home Sales Remain Solid

Such optimism by consumers is no doubt translating into healthy sales of new homes, despite a drop in August of single-family dwellings, according to numbers released Monday by the Commerce Department.

The 7.6% decline follows an upwardly revised July reading to a seasonally adjusted annual rate of 609,000 units. This marks the second consecutive month that sales have topped a 600,000 annual pace since the Great Recession. When last month sales are compared to a year earlier, they are up a whopping 20.6%.

“Given the huge jump in sales in July, the August reading remains robust,” said Ed Brady, chairman of the National Association of Home Builders. “Sales are up 21% from August last year and year-to-date they are running 13% higher, indicating that the housing recovery remains firmly on track.”

The inventory of new homes for sale was 235,000 in August, which is a 4.6-month supply at the current sales pace. The median sales price of new houses sold was $284,000.

“A low supply of homes, a broadening of the market with additional sales growth in lower price points, and rising household formation all point to a growing demand for housing as we move into 2017,” said NAHB Chief Economist Robert Dietz.

Regionally, new home sales fell by 34.3% in the Northeast, 12.3% in the South and 2.4% in the Midwest; however, sales rose 8% in the West.

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