No Time for Uncertainty

No Time for Uncertainty

Healthy activity in consumer durable goods providing positive economic signals

The drumbeat seems unrelenting: The economy is weak and is not going to get better -- or so say too many people. Eighty-three percent of all Americans think the United States is still in a recession, but at least they are not acting as if they are in a recession. Consumers are saving a healthy 4.5% of disposable personal income. The average over the last 10 years is 3.6%. The rate is healthy without being excessive.

We are also spending at a healthy clip. Total retail sales for the past 12 months (deflated) are tracking 2.1% above year-ago levels, and the year-over-year comparisons are trending higher. The positive trending is still evident if we take out gasoline. More people are employed, more saving, more spending -- life is good!

Consumer activity is, of course, the demand-pull on new orders of consumer durable goods. New orders for the last year are 7.4% higher than this time in 2011, but the rate of rise in the dollars being spent is slowing somewhat. The rate of rise is slightly steeper than is typical, which should translate into healthy business activity and profits for IndustryWeek readers. It would be normal for the good news to last until late 2013. Plan on more positive news over the next year-and-a-half.

There may be some concern about new orders have slowing to a 7.4% growth rate from the peak of 8.9% in first-quarter 2012. On the plus side, inventory levels have adjusted quickly to the demand level and are 7.5% ahead of this time last year. The responsiveness in inventory levels is encouraging and speaks to more recovery ahead.

The ascent in the U.S. Leading Indicator, (an index published by the Conference Board), is good news for consumer durable goods new orders (see chart below). You can look forward with confidence to more activity in this sector since this important leading indicator is rising. Positive trends in the Institute for Supply Management's purchasing managers index and the ratio of inventory to orders also portend good news ahead.

Consumer Durable Goods New Orders
to U.S. Leading Indicator
New Orders 12-Month Moving Total to USLI Raw Data
All of this good news will hopefully provide the encouragement needed to make the bold decisions necessary to maximize profit potential over the next year. The overriding need right now is to invest in our businesses. Manufacturers also should focus on driving efficiencies to get ahead of inflation and the cost pressures and investing in equipment and processes that will generate increased operating cash. We will need that cash to pay higher health care insurance premiums in 2014. Flow-through tax entities will need more cash to pay higher taxes as well. Spend money now to ensure a profitable future. Firms that are hoarding cash and afraid to move aggressively forward will find they are playing catch-up for years to come.

Contributing Editor Alan Beaulieu is an economist and president of ITR (itreconomics.com). He is co-author, with his brother Brian, of "Make Your Move," a book on spotting business-cycle trends.

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