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Sales of manufactured goods falter

Bob Moon Feb 28, 2012

Kai Ryssdal: Here’s an economic indicator that doesn’t usually merit more than a glancing blow in the business news of the day: orders for durable goods. Refrigerators, computers — stuff that’s supposed to last more that three years. We learned this morning orders for ’em sank 4 percent in January — the biggest drop in three years. Which sounds bad, because demand for that kind of stuff can be a sign of how busy American factories are going to be.

But our senior business correspondent Bob Moon explains, today’s numbers might not be as scary as they sound.

Bob Moon: First off, the durable goods numbers are notoriously volatile and often revised. Michelle Girard is senior economist at RBS-Greenwich Capital. She points out that a long list of recent manufacturing surveys all point in the opposite direction — higher. Even the latest job reports show factory hiring is up.

Michelle Girard: None of those have shown any sort of a pullback. Instead, they suggest the manufacturing sector is continuing to grow strongly. And so I’m not sure that this is the start of a concerning trend, in terms of the outlook for business spending.

Ian Shepherdson agrees. He’s watches the U.S. economy for High Frequency Economics.

Ian Shepherdson: With consumer confidence recovering and export demand apparently recovering, small businesses more optimistic, bank lending rising, why on earth would you suddenly see a downshift in durable good orders? It just doesn’t make any sense.

So what caused the drop? Well, last year, businesses that retooled and bought new equipment could deduct 100 percent of that expense from their taxes. That incentive, Shepherdson points out, ended December 31st.

Shepherdson: Like all tax breaks, when the deadline approaches for the end of it, people rush in and do their spending, and then you get an inevitable correction immediately afterwards.

A “correction,” in this case, that accounts for the spending drop off. But given the previous three-month trend upward,  Shepherdson expects a quick rebound.

RBS economist Michelle Girard says it wouldn’t be the first time the durable goods number has proved misleading.  

Girard: We’ve had “head fakes” before, where we’ve overreacted to a weak number in the first month of the quarter, and been reassured by strength that was seen subsequent. And I just, for that reason, have learned my lesson.

So this could just be a little pothole on the road to recovery.

I’m Bob Moon for Marketplace.

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