In
the latest economic news, durable goods orders dropped 7.3 percent in July
according to the Commerce Department, the steepest drop in nearly a year. Contributing to the drop were fewer orders
for commercial aircraft and weakened demand for computers and electrical
equipment among businesses.
The
drop in durable goods orders is a definite sign that the business economy is
losing momentum. Yet the New Economy
Index (NEI), which measures the overall state of the retail/consumer economy is
still in fine shape. Why then is there
such a disparity between the manufacturing economy and the retail economy?
Manufacturing
typically slows before consumers start reigning in spending on discretionary
items. What we’re witnessing the
beginnings of a slowing economy where the manufacturing sector will be the
first to experience weakness. Then a
spillover effect will eventually make its way into the everyday economy of
consumer spending. It’s a slow, gradual
process akin to a large tanker ship doing a turn at sea: it takes time for the forward
momentum to reverse before the shift in direction can be made.
Big
ticket items and luxury goods are still selling mainly because high-end buyers –
the driving force behind the current stage of the recovery – are always the
last to exit when the Ferris wheel grinds to a halt. Big spenders are still spending like there’s
no tomorrow, which is why the stocks which comprise the NEI are still mostly in
a rising trend. Eventually this trend
will reverse, however, when these big money spenders realize the economic
picture isn’t as rosy as it was earlier this year.
In
reality, the seeds to the next recession were sown when the Federal Reserve first
hinted this spring that it would begin “tapering” the $85 billion/month asset
purchases at some point later this year or early in 2014. The taper talk led to a major spike in
Treasury yields, which has all but torpedoed the bubble in income-oriented
investments. The yield spike has also
begun to put cracks in the real estate recovery, as witnessed by the 13.4%
plunge in new home sales for July.
Higher mortgage rates are beginning to bite into potential homeowners’
pocketbooks.
The seeds to the next recession – likely sometime in 2014 when the long-term Kress cycle bottoms – have already been sown by the very regulators who are supposed to keep the economy on an even keel. The relentless tendency of the central bank to zig when they should be sagging is having a negative impact already on investor expectations, which is where declines in spending and investment patterns always begin.
