As we have pounded the table for the past 2 years, the one most fundamental component of a self-sustaining, "escape velocity" US recovery has been the persistent absence of corporate spending and capital expenditures, as a result of a corporate mindset in which it is better to reward shareholders with short-term gains such as dividends and stock buybacks, than invest in the future via CapEx (or M&A). Which is why we were eagerly looking forward to today's Durable Goods number as it provides the best read of how America's corporations are gearing up for capital spending in terms of both orders (which can be cancelled at any time as Boeing so vividly remembers in the aftermath of the Lehman bankruptcy) and actual shipments. On the surface, the numbers were great, beating expectations across the board.
The full breakdown:
- Headline Durable Goods including volatile transports were up 3.5%, beating expectations of a 2.0% rise, and up from an upward revised -0.7%.
- The much more relevant and informative Durable Goods ex transports rose 1.2%, beating expectations of a 0.7% increase, and up from a downward revised -0.7%
- On the pure CapEx front, Cap Goods orders non-defense exluding aircraft rose 4.5%, slamming expectations of a 0.7% increase, and up from an upward revised 0.7%
- And finally, Cap Goods shipments non-defense ex aircraft rose 2.8%, on expectations of a 1.0% increase and up from a downward revised -0.4%.
Still, even with the current pick up, the trend needs to show some additional strength to breach the recent declining trendline as shown in the charts below, first that of Durable Goods, helped recently quite a bit by Boeing orders:
[7]
And certainly more needs to happen in the Durables ex aircraft:
[8]
As for actual shipped Capex, it is still trailing at the bottom:
[9]
Nonetheless. today's news was great, and if one is so inclined, one may be convinced that the CapEx recovery is just around the corner.
However, because there always is a but, here is the BUT.
November traditionally is a month in which the bulk of the increase is due to seasonal adjustments. This was no exception, with Not Seasonally Adjusted data declining substantially in every category: Durable Goods, both core and ex-trans, declined by 2.3% and 6.4% respectively, while core CapEx, Shipments and Orders, also dropped by 2.0% and 1.0% respectively.
So what's the big deal: there are seasonal adjustments every year right. Of course, however the seasonal adjustments are there to revise the sequential changes, not the annual changes from a year ago. In other words, while the mover from October 2013 to November 2013 may be adjusted for seasonal variation, it is the move from November 2010 to November 2011 to November 2012 to November 2013 and so on, that should be virtually in line both adjusted and unadjusted.
Which is why it is odd that when we look at just this data for the Durable Goods ex transports, that we see avery curious Seasonal Adjustments aberation.
See if you can spot the difference in the chart below:
[10]
The chart above looks at the Year over Year change in Durables ex transports for the month of November across 4 different years. What immediately stands out is that while 2010 through 2012 acted just as expected, with SA and NSA data almost identical, in 2013 the data... diverged. In fact, the divergence between the SA and NSA was inexplicably over $2.2 billion. What does that mean? Well, if the SA number was accurate, and in line with what the NSA number predicted, Durables Goods ex-transports would have declined by -0.5% instead of rising by 1.2%. The same would apply to all other key categories from the report.
In other words, when all else fails, and when Unadjusted data points to a decline, just do what the government's Arima X-13 model [11]is so good at doing, and adjusted the data.