Today’s updates on initial jobless claims and durable goods orders bring encouraging news, albeit with a caveat: a widely followed subcategory of durable goods—commonly referred to as business investment—looks troubling. Does the weakness in business investment—i.e., new orders for non-defense capital goods less aircraft—overwhelm the brighter numbers in durable goods overall and the sharp drop in new filings for unemployment claims?
In search of some perspective, let’s start with the claims data: last week’s filings dropped a hefty 35,000 to a seasonally adjusted 353,000, or just slightly above a four-year low. Keep in mind that claims data in recent weeks has been buffeted by seasonal noise related to the auto industry (for some background, see here and here). Nonetheless, as the weeks roll on and new claims remain at or near the lowest levels in several years, it’s premature to jettison the case for optimism.
As usual on these pages, I consider the year-over-year percentage change in jobless claims before seasonal adjustments to get a sense of how the true trend may be unfolding. On that front, the numbers continue to look good. As the second chart below shows, the 8.7% annual decline in new claims as of last week is a robust sign that the labor market, for all its troubles, hasn’t imploded and continues to heal. Slowly, but that's still better than deteriorating.
If and when a new recession is upon us, or threatening in no uncertain terms, we’ll likely see a sharp and sustained rise in jobless claims. For the moment, at least, that dire change in the trend was still MIA as of last week.
As for new orders for durable goods, the broad measure for this indicator posted a decent if not terribly impressive month in June: +1.6%. That’s the second straight month of roughly equivalent gains. The trouble spot was in capital goods, which slumped 1.3% last month after a 2.7% rise in May.
You can’t tell much from monthly data, however, and so it’s on to the year-over-year change in search of deeper context. Alas, there’s a mixed bag here. Durable goods overall rose a strong 8% last month vs. the year-earlier level. Even better, the annual pace has been picking up lately.
The annual growth rate for capital goods, however, tells a different and substantially darker story. Indeed, for the first time in more than two years, the year-over-year change in new orders for non-defense durable goods less aircraft was roughly unchanged in June. As the chart above reminds, this indicator's descent to zero has been in the making for several years.
The question is whether business investment trend is a superior measure than the broad indicator of durable goods for assessing the business cycle? The answer depends on the dismal scientist dispensing the advice. Clearly, some analysts say that the trend in capital goods offers a robust look ahead, and one that’s more sensitive to the true state of the economy compared with durable goods overall.
Another way to ask the question given the latest numbers: Is the recent surge in demand for aircraft and military goods—orders that are included in the broad measure of durable goods—distorting the true picture?
Perhaps. Surely no one should dismiss the discouraging news in business investment. But if this indicator’s darkness provides a better read on what's coming, we’ll soon see confirmation in other indicators. So far, we’re still well short of an open-and-shut case that the economy is falling off the cliff. The continued decline year-over-year decline in new jobless claims is one example for arguing otherwise, and there are several others as well.
Granted, the tide could be turning. There are many reasons for thinking so, but relatively few of those reasons are based on hard numbers that have been reported. That may change in the weeks ahead, but for now it’s still hasty to dig a grave for the cycle. I have my shovel ready just in case, but it’s still in the shed. After all, I don't want to scare the neighbors by bringing it out in full view until I'm sure I'll be digging.