Orders Trends Raise a Red Flag

Here’s some rather disconcerting analysis from Moody’s on the state of corporate America. They highlight capital goods orders and correlation with business sales noting that such declines have only occurred in the mist of recession:

“Gains in the September durable goods orders report were not enough to accelerate US business sales. Core capital goods orders tightly correlate with sales and investment, and those orders fell 6.5% yearly last quarter — the sharpest decline in almost three years. Such a shortfall has been previously seen only in the throes of a recession. Domestic consumer spending growth may protect the economy from the full brunt of this distressing development, but businesses with international operations will not be as fortunate. When core capital goods orders have shrunk on a yearly basis, business sales growth fell by an average of 3.3% (Figure 2). Core capital goods orders held flat on a monthly basis in September; we must soon see them rise — like last month’s new orders subindex from the ISM Manufacturing survey — if we are not to see a deepening business sector slump.”

Source: Moodys

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • kman

    And ECRI comes out and takes thier victory lap.

  • Mikael Olsson

    I’m not at all surprised. Corporate profits up while households are deleveraging. Money exiting the everyday circulation in two directions at once – can the result be anything else than a new slump?

  • Mikael Olsson

    Am I all alone in separating out the state of the everyday economy from the rest? Sometimes it seems so.

    Looking at the stock market strikes me as folly. Ditto shadow banking sector size. That money doesn’t return to the everyday circulation by divine and predictable hand. If anything, the everyday economy would probably benefit from the financial sector growth flatlining until the recession has fully played out? (If psychological effects were not a factor, that is. But I know that they are.)

  • Octavio Richetta

    I don’t think ECRI can take a victory laps unless some miracle dates the recession, if we have one, some time in the early summer. I.e., if a recession starts one year after their call, their call is totally useless.

  • Mikael Olsson

    How The Economy Is Put Together – the way Mikael Olsson sees it

    Primary: The everyday consumption-production circulation. The govt taxes and redistributes and is a part of it. Investment feeds into this.

    1st derivative: Corporate profits. House loans. Private savings.

    2nd derivative: Stocks of companies that actually interact with the everyday economy. Profits of companies working in the financial sector.

    3rd derivative: 3 letter acronyms combining stuff from 1 and 2. Stocks of companies working in the financial sector.

    4th derivative: yet more 3 letter acronyms that are, frankly, mostly vaporware

    A “public vs private sector” description of our reality does not make much sense to me in today’s world. The financial sector is too big and too separate from the workings of the rest of private sector and has largely a life of its own. (Some investors still looking at P/E give it a half-assed reality check in the 2nd derivate layer but that’s still 2 layers removed from reality.)

    Please feel free to explain to me how wrong I am, but do back it up with facts :)

  • freemarketeer

    You’re not.

  • Mikael Olsson

    Okay, you could call taxation a 1st derivate, but its spending and redistribution is not. I put it at all the same level for simplicity.

  • Joseph Browning

    The ECRI said that we were on the edge of a new recession as far back as September of 2011.

    Those who attempt to predict the future must be held to their predictions AS MADE, not in terms of “yeah, well, we’ll eventually have a recession and THEN I’ll be right, man….”

    Eventually we’ll have another recession, but there is absolutely no type of “victory” in a call that has proven so terribly inaccurate.

    From THIRTEEN months ago…
    http://money.cnn.com/2011/09/30/news/economy/double_dip_recession/index.htm

    “It’s either just begun, or it’s right in front of us,” said Lakshman Achuthan, the managing director of ECRI. “But at this point that’s a detail. The critical news is there’s no turning back. We are going to have a new recession.”

    Achuthan said all those indicators are now pointing to a new economic downturn in the immediate future.

    Achuthan said it is still possible that the recession will be mild this time, lasting less than a year with relatively limited job losses.

  • Greedsgood

    Sales Growth is decelerating rapidly. Not a pretty picture..