Durable goods orders miss expectations

When the U.S. Commerce Department released its Advance Report on Durable Goods for February late last month, the financial markets weren't thrilled, as the 2.2 percent rise fell short of the increase that analysts expected.

In general, the markets have been jittery about the economy lately. Stocks have been shaky, and bond yields, which reached a 2012 peak of 2.379 percent on March 19, had fallen back below the 2.20 percent mark less than 10 days later. The latter bodes ill for hopes that savings accounts and other deposits could start to ride a wave of rising interest rates.

Three reasons the markets are so sensitive

The 2.2 percent February increase compares favorably with a decline of 4.0 percent in January, and a decline of 0.9 percent the previous February. Still, the consensus expectations were for a 2.7 percent increase, and the markets are especially sensitive to disappointments right now for three reasons:

1. There is a feeling that if the markets aren't moving forward, they are moving backward. Equilibrium is a very hard thing for an economy to maintain. Typically, growth is either rising or slowing, and lately the concern has been that it is starting to slow.
2. There is global weakness to overcome. So much emphasis is put on the U.S. economy right now not only because it is the world's largest, but because of the knowledge that it has to overcome weakness in other countries, from recessions in Europe to slowing growth in China.
3. Higher oil prices may be leading to caution. After last year's experience, investors are keenly aware that rising oil prices can put the brakes on economic growth. Oil prices are up this year, so the markets are watching for signs that it has started to have an effect on growth.

Durable goods orders and savings accounts

The reason to look at durable goods orders as an indicator of where savings account interest rates might be heading goes beyond the general notion that what's good for the economy will ultimately be good for higher savings account rates. That's true, but the relationship is even stronger with durable goods orders than with broader economic indicators.

Manufacturing -- which produces those durable goods -- typically depends on expensive plant and equipment, and despite automation measures is still fairly labor intensive. Thus, manufacturing is the type of business that can create strong demand for capital when companies are in an expansion mode. Demand for capital is good for the lending business, which makes banks want to attract deposits to fund those loans. This ultimately should lead to higher rates on savings accounts and other deposits.

The key, then, is for demand for durable goods to be strong enough to give manufacturers an incentive to expand. Unfortunately, the 2.2 percent growth rate as seen in February probably won't cut it.

The original article can be found at SavingsAccounts.com:Durable goods orders miss expectations