Tomorrow we get an inside look at the US economy. Specifically, we get to see the potential for the coronavirus outbreak to have a lasting effect on the economic outlook.
Durable Goods Orders is one of the key metrics we want to be tracking going forward. This will help us figure out what kind of recovery we can expect now that most countries in the world are putting out plans to reopen their economies.
There are several moving parts that need to be fit together in understanding what’s a stake here.
First, we are all aware of the immediate effects of the coronavirus on the economy. The shuttering shops and the loss of employment, to name a few.
But there is a knock-on effect from that, where closed stores aren’t selling, so they aren’t restocking. This means the manufacturers of those goods aren’t selling, either. And this will run down production.
Projecting the Future
Durable goods comprise orders for things that will last for more than three years.
In other words, it’s a representation of where companies expect to be, well after COVID-19 is over.
Right now, companies have been hunkering down, cutting capital expenditures as much as possible in order to preserve capital. This is because they don’t know how long their businesses will have to survive on little or no income.
Waiting to buy new machinery, computers, vehicles, etc is one way to preserve liquidity. But this drop in durable good orders means that major manufacturers would see their own sales be affected. Therefore, they cut back on their own orders.
This can produce a circular effect, affecting retailers who depend on major industries to pay workers who then buy at stores.
How Long Can We Wait?
If most businesses are counting on returning to normal, they will keep placing durable orders. This will minimize the longer-term impact on the economy.
In fact, some businesses might increase orders, taking advantage of lower prices. So, if orders stay steady or go up in spite of coronavirus, it would raise hope for a U or even V-shaped recovery.
A significant drop in durable goods orders would imply that we are more likely to see an extended U or even L-shaped recovery. Safe-haven assets might get an extra wind, in that scenario.
What We Are Looking For
The consensus among analysts is pretty depressing.
Most are projecting a drop of around -11.6% in durable goods orders, compared to growth of 1.2% in the prior month. That would be the worst performance since late 2014.
A good chunk of that, though, is attributable to Boeing, and airlines cutting orders for jets.
When we remove transportation to look at Core Durable Goods, projections are for them to come in at -5.8% compared to -0.6% prior.
This would be the worst performance since the 2008 recession. And it might be a harbinger of what the economy will look like in the next several months.