US Durable Goods Orders Preview: Business investment to resume

• Durable goods orders are forecast to fall in October as government defense spending ebbs.
• Business investment should return after two negative months.
• Fed policy and dollar remain supported in the fourth quarter.

The US Census Bureau publishes its Report on Durable Goods – Manufacturers’ Shipments, Inventories, and Orders on Wednesday, November 21st at 8:30 am EST, 15:30 GMT. 

Expectation: Business spending to return to trend

Overall orders are predicted to drop 2.5% in October as Defense Department purchases of aircraft which had surged 119.1% in September tail off.  Core capital goods, officially known as nondefense capital goods, excluding aircraft, an important proxy for business investment should rise 0.2% following two negative months at -0.1% and -0.2% and four very strong months averaging 1.25% from April through July. Orders for all goods outside of the transportation sector are expected to rise 0.4% in October after the prior month’s 0.1% gain

 Durable goods are items from toasters to helicopters to shoes that are designed to last three years or more.  

US Economy

Business investment has been one of the pillars of the economy over the last two years with capital spending at its best level since the recession. The resumption of business planning activity will be an indication that despite recent equity turbulence executive are taking their cues from the economy at large rather than the stock market.

US GDP has averaged 3.23% in the first three quarters and is tracking at 2.8% in the fourth according to the Atlanta Fed’s GDPNow model. If accurate that would give the States 3.13% for 2018 the strongest annual expansion in over a decade. The first revision of third quarter GDP will be released on Wednesday, November 28^th.

Other indicators in October bear out the continuing economic growth. Non-farm payrolls were much larger than anticipated at 250,000 and average hourly earnings increased to 3.1% its best average since the financial crisis. The 3.7% unemployment rate is a generational low.

Business sentiment measures, manufacturing and service purchasing managers’ indexes remain firmly in expansion territory though down from their August and September post-recession highs.

Consumer attitudes are also buoyant. The Michigan Consumer Sentiment Index of 98.3 in October though lower than March’s 14-year record is a good sign that consumers will continue their expansive ways in the important holiday shopping season.

Federal Reserve and the Dollar

Business investment is one of the central bank’s key indicators. The return of business procurement will support the central tenant of Fed policy that the US economy is robust enough to withstand further rate normalization.  December’s widely expected 25 basis point increase should retain its near certainty.

The dollar’s recent mild weakness has more to do with the changing and largely non-economic fortunes of the euro than any change in US economic growth or Fed policy. The strength of the economy and the central bank's immediate rate policy should continue to support the currency.

However, recent milder policy notes from Chairman Powell, who aknowledged "challenges ahead" for rate policy and Vice Chairman Clarida who said the Fed monitors the global economy because there "is some evidence that its slowing" could bring the Fed's three projeced 2019 increases into question. The bank will issue updated economic and rate projections after its December 18th-19th meeting.