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Producer Durable Orders Indicate Economy is Weakening

Prof. Peter Morici - 5/26/2006

The Commerce Department reported producer durable goods orders in April were down 4.8 percent. The consensus forecast was minus 0.1 percent. In contrast, durable goods orders expanded 6.1 percent in March, driven significantly by robust orders for commercial aircraft and components which fluctuate dramatically month to month. Excluding commercial aircraft and components, durable goods orders were down 2.1 percent in April.

Orders for capital goods—the machinery used by industry to make final goods and services—fell 8.1 percent in April, after expanding 12.3 and 11.6 percent in March and February.

The slowing new home industry is adding to woes of durable goods manufacturers, as new homes require plumbing, appliances, climate control systems, and other products lasting more than a year.

Overall, flagging durable goods orders indicate the economy is slowing, perhaps more than Ben Bernanke and Fed policymakers are anticipating.

Overall the economic news is pulling Federal Reserve policymakers in two directions. Core wholesale prices under control, robust productivity growth, flagging housing and durable goods sales, and moderating retail sales indicate the economy is cooling. However, core consumer prices surged in March and April, industrial production has been advancing smartly, and capacity utilization is at its highest level since July 2000; these indicate inflation is heating up.

On the basis of the data we have to date, look for the Fed to push the Federal Funds rate to 5.25 percent in June.