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An Economic Trough on the Horizon?


Indicators pointing towards optimism.


Jack Lavery is the former Global Chief Economist at Merrill Lynch and author of The Lavery Insight economic newsletter offered exclusively on Minyanville. For a free 14 day trial, click here.

Today's release of manufactured durable goods orders in May surprised all expectations and rose 1.8%. This comes on top of an upwardly revised 1.8% increase in April, which had previously been reported as a 1.7% gain.

The market consensus had expected a decline of 0.8%. The April and May increases are the strongest since the beginning of the recession in December 2007. Durable goods orders have now advanced in 3 of the past 4 months.

The jump in capital goods orders was propelled by a 10% increase in non-defense capital goods orders driven by a 68% surge in non-defense aircraft orders.

Orders for transportation equipment rose 3.8%. More than 100% of this rise was due to non-defense aircraft orders, as orders for motor vehicles and parts dropped 8.1% in May.

In contrast, shipments of manufactured durable goods fell 2.1%, the 10th consecutive monthly drop. Unfilled orders have fallen for 8 straight months. The May decline, however, was slight at 0.3%, vs. a 1.1% drop in April.

The benefit of today's surge won't help second quarter real GDP due to be reported on July 31. I still believe it will be down close to 4% annualized, double the market consensus decline. But, I believe the National Bureau of Economic Research will ultimately define the economic trough as August 2009. I expect an underwhelming recovery, because of the rise we've seen in Treasury yields and mortgage rates.

My call of an overall economic trough in August 2009 includes still downward pressure on housing, especially home prices, into 2010. And, the unemployment rate, a lagging indicator, will continue to rise into 2010.

It is vital at this afternoon's conclusion to the Federal Open Market Committee meeting that the Fed continue to maintain an effectively 0% federal funds rate, but that it will adroitly lean against inflation once a recovery has clearly started.

Richmond Fed Index Supports Recovery
(published June 23, 2009)

The Richmond Federal Reserve Bank's manufacturing index for June released Tuesday came in at +6, higher than the +4 reading in May, and the best level since a comparable +6 in May 2008.

The improvement was broadly–based, as every component, except shipments improved. Even the employment index reached +7 in June, from -12 in May. This is extremely significant.

Strong gains in new orders and order backlogs were important to the overall index. The new orders component was its strongest since April 2006. Order backlogs achieved a +8 reading, the first time it has been in positive territory since August 2007, before the recession started.

In the Richmond Fed's own words, "Manufacturing activity in the central Atlantic region advanced somewhat faster in June." The future expectations component 6 months ahead slipped a bit in June to +12 from +14.8 in May, but is fully in-line with expansion beginning in the second half.

The Richmond Fed Survey re-enforces the strength in the Philadelphia Fed index reported last Thursday.

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