Schwab review durable goods report Jan 28, 2010

Durable goods orders (chart) rose by 0.3% in December, versus the 2.0% rise that had been forecast, and November’s 0.2% increase in orders was downwardly revised to a decline of 0.4%. Ex-transportation, orders were up 0.9%, compared to the 0.5% growth forecast, and November’s figure was favorably revised from a 2.0% increase to a 2.1% advance. Monthly orders data of goods intended to last at least three years can be very volatile as large orders for items such as airplanes and military equipment have a tendency to distort the data.

At first glance, the headline report of a smaller-than-expected increase may have disappointed some on the Street, but digging into the report from the Census Bureau, there were some components that suggest businesses are becoming more willing to spend and the consumer may be becoming more optimistic about the economy. New orders for nondefense capital goods ex-aircraft, considered a good proxy for business spending, increased 1.3%. This figure has grown for the second-straight month and jumped 3.1% in November, and if this continues, the favorable trend could foreshadow that corporate America is shifting focus from extreme cost cutting and may be gearing up to ramp up production, adding some support to the economic recovery. Moreover, when excluding new orders for defense and aircraft—considered a gauge of consumer sentiment—new orders rose 1.0% in December and 2.6% in November, suggesting that the relatively improving employment outlook and continued recovery in the economy has consumers more comfortable with their financial position and are becoming more willing to spend discretionary funds on bigger ticket items.