New Orders

No, this is not about the New Order, the conspiracist’s nemesis.  This is about New Orders of Capital Goods.  When companies forecast sales growth ahead, they place orders for capital equipment to meet the projected increase in demand.  One version of the monthly report on new orders excludes aircraft orders which are volatile; fulfilling the order – the delivery of the new aircraft – are structured over time.

Below is a chart of the year-over-year percentage in new orders excluding both aircraft and defense spending.  I have used quarterly averages to smooth and show the trend. (Click to enlarge in separate tab)

As you can see, there are warning signs of recession or very low economic activity as the quarterly change is close to zero. The most recent monthly change has, in fact, dropped below zero.

The value of new orders has a fairly strong correlation with the S&P500 stock index, adjusted to scale.

Some have suggested that business plans are on hold till after the election and the coming negotiations over budget sequestration, or the “fiscal cliff.”  If so, this may be a temporary drop. The stock index usually either anticipates or is concurrent with the drop in the dollar amount of new orders.  Further gains in the index may be minimal unless this new order indicator of business sentiment turns upward.

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