US Durable Goods: Room to Keep Rates High?
The markets and the Fed seem to finally be aligning around what will happen with rates this year. But that doesn’t mean the data will come in in a way that will match those predictions. Inflation is generally expected to trend downward, allowing for the expected three rate cuts.
That leaves another variable as a potential mover for the dollar, and monetary policy: The economy. The Fed believes that interest rates are “restrictive” at the moment. That means that high rates are slowing the growth of the economy, in their estimation. The Fed doesn’t want to be responsible for slow economic growth unless it’s necessary, so it is motivated to move rates down to where they are “neutral”.
Keeping Up With the Forecasts
If the economy keeps growing at an accelerated rate, then there is less reason for the Fed to cut. In fact, fast economic growth generates inflationary pressure, which provides reasons for monetary policy to remain tight. So, even if inflation comes down, if the economy keeps growing at an accelerated rate, then rates may stay higher for longer.
One of the key indicators for the future evolution of the economy is durable goods orders. There are things that businesses buy that will be used for more than a year. So, things like airplanes, machinery for factories, trucks, excavators, etc. Generally, businesses only increase orders for those kinds of things when they expect to increase production, thanks to strong consumer demand.
Keeping the Consumer Happy
Positive growth in the US durable goods orders, in other words, is seen as predictive of a growing economy. Couple with good consumer confidence, it could mean that underlying inflationary pressures from faster monetary circulation could persist. On the other hand, if durable goods turn negative, then it could mean that the Fed’s policy has run its course and it’s getting time to cut rates.
Because, buy and large, a significant portion of business expansion is done with credit. Businesses typically take out loans to finance expansion projects that fuel increases in the durable goods orders. If inflation is high, then it’s harder to pay for or financially justify the expansion projects. Lowering interest rates helps spur the economy in part by making it easier for businesses to expand productivity.
What the Data Says
In January, the US saw a reversal in durable goods orders, but that apparently was related to harsh weather conditions at the time. For February, the figure is expected to bounce back into positive, suggesting that the US economy is expected to keep growing. Durable goods are expected to have grown at 1.7% compared to -6.1% prior.
Meanwhile, consumer confidence is expected to have remained elevated. The Conference Board’s consumer confidence uses 100 to divide between optimistic and pessimistic views. The forecast is for February’s CB survey to show consumers remained optimistic at 106.5 compared to 106.7 prior.
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