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How Durable the Economic Goods

Economists touted today’s manufactured goods gains as the linchpin of the economic recovery. Considering that manufacturing accounts for only 11% of the US economy, and durable goods is about half of that, that’s hanging a lot on this one sector. Is there any reason for bullishness on this?

I’ve put together a chart of Durable Goods Orders (DGO), updated with today’s data release, to help you decide. The graph is busy, but if you spend some time studying it, you should see a clear message. The widely touted recovery is a lot weaker than the year to year percentage gain of 12.5% would indicate, and that’s potentially a problem for the stock market.

Click to enlarge
Click to enlarge

This chart reflects actual data, not the smoothed seasonally adjusted data that the government Ministry of Truth and the captive mainstream media lapdogs rely on to obscure and obfuscate reality. However, in order to analyze raw actual data, we have to do some things on the chart to make it possible to see what’s really going on. To do that, I apply the tools of technical analysis, including trendlines, moving averages, and comparison charts. In this case the comparison is with the S&P 500. Perhaps the comparison on this chart will help us to glean something that will help us to make an educated guess about the future of stock prices.

Next, using the usual yearly high in March and usual yearly low in June, I drew best fit trendlines forming channels that defined the broad trend of the data. We can see that the data tends to move within parallel channels. Finally, I added 3 moving averages as additional trend benchmarks. The 6 month moving average reflects short term trends without the noise of the monthly data. The 12 month moving average shows an intermediate trend, filtering out the seasonal swings. The 2 year moving average is best suited to depicting the long term business cycle.Trend change is confirmed when the raw data and the 6 month moving average crosses through the two longer averages.

So what does this chart tell us. First, we see that while the intermediate trend of the past year is up; the long term trend, indicated by both the trend channels and the two year moving average is still a long way from being broken. My assumption would be that the long term trend is still headed down until there’s evidence to the contrary in the form of a break of the channel, and/or the two year moving average.

March is typically the strongest month of the year with gains of 10-20% in strong economic years, and 5-10% in weak years. DGO would need to rise 12% in March to bring the graph to the long term trendline as well as slightly break the 2 year moving average. A gain of around 12-13 % would leave us in limbo as to whether the long term economic decline had reversed. Anything less than 12% would tend to signal that the economy is still within the parameters of long term decline, while anything greater than 13% would tend to suggest that the recovery has staying power. As of February, we simply cannot make that judgment. This picture is in agreement with those economists who say that the recovery is weak, tentative, and at risk of a double dip. Economists and talking heads like Brian Wesbury, who talk of a V shaped recovery, are smoking crack and pitching an agenda.

Another thing that we see on the graph is that the stock market and durable goods orders tend to move concurrently. This is particularly evident with the 6 month moving average of DGO, which can be a little ahead of or a little behind stock prices. In today’s environment, it’s a LOT behind. Based on the history of this relationship, it would seem that as this gap widens, the risk to stock prices increases. Durable goods actually led the market a bit at the 2002-2003 bottom. This time, stock prices have galloped way ahead of DGO. If DGO doesn’t catch up in March, the likelihood of a major decline in stock prices would grow.

Weakness in the DGO 6 month moving average in the months ahead would be a red flag for the market. If the 6 month MA turns back up, and especially if the raw data breaks out of the downtrend channel, market bulls could be sitting pretty for the next couple of years.

Right now, we’re in a kind of limbo. The recovery is clearly weak in terms of where we’ve come from and in terms of the secular trend. There’s no reversal there. But in the short run, the direction of the 6 month and 12 month moving averages is mildly positive, making it possible that a secular trend turn signal may lie ahead in March. The stock market has placed an unusually large bet on a strengthening recovery. My guess, based on the data I watch in the Wall Street Examiner Professional Edition Fed Report, is that this is a bad bet.

Beware the Ides of March.

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