Tomorrow we have the release of two key bits of data for the US economy. And the consensus among analysts points in opposite directions.
One could point out that they cover separate months, but it appears it has more to do with focusing on different outlook timeframes. This means that the US economy might be in for a rough patch in the short term. Nonetheless, things could improve further down the line.
The first data to come out are the Durable Goods Orders, which the consensus points to an improvement in the data. Albeit, the improvement is moving from negative to just marginally positive, but you’ve gotta take a win when you can.
Then, later, we have the University of Michigan Consumer Sentiment Index. Analysts expect the index to decline a bit. But that’s a move lower from an extraordinarily high result.
So, what’s really going on here?
Durable Good Orders cover heavy machinery that the industry uses, like airplanes, machines for factories, and backhoes. These are materials that a business expects to use for more than three years and are a substantial investment.
Typically, if businesses expect the economy to improve, then they will invest more in machinery to be able to reach more customers. Car manufacturers, for example, will have to buy more of the machines they use to build cars if they want to build more cars. And the reverse is true as well. If companies expect that they won’t be able to increase sales, then they won’t spend as much on increasing capacity.
The University of Michigan Survey, on the other hand, asks how much (mostly average) people are willing to buy things. Higher consumer sentiment generally translates into higher sales, if inventory is available, or inflation if inventory is not available.
The basic laws apply
If we think of consumer confidence as a measure of demand, then the durable goods orders are a measure of supply. In particular, it reflects the situation with the supply chain, as companies need to fulfill their orders to get new ones. A better durable goods number could be a sign that supply chain constraints are improving.
The mismatch between the two numbers could be an indication that businesses are finally seeing a way to ramp up production. Or, at least, a sign to stop reducing production. On the other hand, if consumers are less willing to buy, then we might be finally reaching the limits of inflation.
What to look out for
Typically we want to pay attention to Durable Goods Orders ex transportation, as that is what market participants track most often. The expectation for the data is to move up to 0.5% growth from 0.4% growth prior.
Meanwhile, the University of Michigan Consumer Sentiment Index could drop to 66.9 from 71.7. That’s still broadly in expansion. However, it’s trending in the wrong direction as retailers look forward to Christmas sales.