Posted At : June 25, 2009 10:16 AM
The Census Bureau reported today (6/24) that Durable Goods Orders were unexpectedly up +1.8% in May. This was well above the consensus estimate, which forecast a decline of -0.9%. Most of the increase was attributable to machinery orders which jumped +7.7%. Excluding transportation orders, durable goods were +1.1%; again, well above the consensus projection. Although this particular set of economic data is prone to a high degree of volatility, durable goods orders have increased almost +4% in the past 2 months. This rise in orders represents looks to be good news for the economy since it appears that manufacturers have increased their buying as a prelude to gearing up production. Presumably all of this is in anticipation of a rise in consumer demand. The problem being twofold: First, it is very likely this is just inventory buildup from depleted supplies. When the market went into the tank, companies laid of people and let inventories dwindle down to historically low levels. Now they are counting on increasing consumer demand. I discuss this more below.
Today the Fed couldn’t seem to convince the markets that it will not raise the fed funds target rate anytime soon, and at the same time tout its credentials as an inflation watchdog. To date, the Fed’s Treasury buying program has had a negligible impact on rates overall, and its even larger MBS purchases have not prevented an appreciable rise in mortgage rates. The Fed is facing a situation where an economic recovery is far from assured and consequently they are determined to keep rates low until unmistakable signs of economic progress are clearly evident. As they fight a Keynesian’s mortal enemy, “deflation”, they are trying they’re damdest to “inflate” which will create growth. After all, there are only two ways to pay for the spending: increase growth or raise taxes.