Durable Goods Orders and Gold

New orders for manufactured durable goods decreased 5.1 percent in December. What does it mean for the U.S. economy and the gold market?

Demand for durable goods plunged in December, according to the U.S. Census Bureau. New orders decreased 5.1 percent, the fourth decline in the last five months. The dive followed a 0.5 percent drop in November and was much higher than the expected 0.2-percent gain. It is amazing that the economists’ expectations are almost always wrong (interestingly, they are rather too optimistic than too bearish).

U.S. Manufacturing in Recession

It was a hard year for the factory sector. Industrial production fell almost 2 percent in December on an annual basis, while new orders declined 0.58 percent. As one can see in the chart below, the slowdown in new orders started in 2010, but accelerated in 2015, with a 3.5 percent decline for the full year.

Chart 1: Manufacturer’s New Orders for Durable Goods from 1992 to 2015.

Importantly, although aircraft orders were way down (orders for civilian aircraft plunged 29 percent in December on a monthly basis), they were not the whole cause of the problem. Core durable goods orders, which exclude defense and aircraft, fell 4.28 percent during December month-over-month and 7.51 percent on an annual basis (see the chart below). Moreover, inventories rose 0.5 percent, while shipments for durable goods dropped 2.2 percent (and 0.2 percent for core capital goods).

Chart 2: Manufacturer’s New Orders for Core Durable Goods from 1992 to 2015.

Fed’s December Hike Was a Mistake

The weak demand for capital goods will translate into the decline in GDP in the fourth quarter of 2015 (and the following quarters). It is unlikely that the Fed will hike four more times in 2016 when the U.S. manufacturing is in a recession. As we wrote in our Market Overview, we believe that interest rates have been clearly held too low for too long and that the Zero Interest Rate Policy is generally harmful to the U.S. economy. However, the Fed was terribly delayed with its action, so it chose a very bad moment for the tightening. Therefore, it may be forced to reverse its stance. The odds for a hike in March plunged from 23.7 on Wednesday to 11.6 on Thursday, according to CME FedWatch. Fed funds future contracts suggest that markets expect only one hike in 2016, not earlier than in November.

Has the Automotive Boom Ended?

The orders for motor vehicles fell 0.4 percent in December on a monthly basis, just another sign that the automotive industry is slowing down. As a reminder, the production fell 1.7 in December, following a 1.5 percent decline in November. Therefore, it seems that the auto loan bubble has already peaked. As we have already pointed out, the implosion of the subprime auto loan market should be positive for the price of gold, although not so much as the bursting of the housing bubble.

Conclusions

Summing up, new orders for manufactured durable goods tumbled in December. It is just another sign that the U.S. manufacturing is in a recession and the whole economy is slowing down. Thus, the report on durable goods is good news for the gold market. The weak demand for durable goods will translate into slower GDP growth and will undermine the Fed’s credibility. Oh, we forgot – the U.S. central bank has already lost its credibility. Nobody believes in four hikes this year. The lack of confidence in the Fed’s actions should be bullish for the price of gold since the popularity of bullion can be considered inversely related to confidence in the Fed and the U.S. economy.