Durables Orders, Microsoft, Caterpillar Raise Doubts on US Economy

01/27/2015 8:50 pm EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

A big part of the drop in durables orders came from the always-volatile aircraft sector today, but by no means was that the only problem, and MoneyShow’s Jim Jubak thinks this raises a lot of questions heading into tomorrow’s meeting of the FOMC.

Of the two stories fighting for mindshare among investors today, the negative is in the ascendant.

The positive story is that lower oil prices and interest rates lower than expected for longer than expected will keep the US economy chugging along, despite the drag of a strong dollar on exports and earnings, and despite slow growth elsewhere in the global economy. That positive story is embedded in the consensus among economists surveyed by Bloomberg that Friday’s report on fourth quarter GDP will show the US economy expanding at a 3% annual rate.

The negative story is almost a mirror image of that. A stronger US dollar and slow growth in Europe, Japan, and (relatively) China will hurt earnings at US exporters and cut into US economic growth, despite lower oil prices and low interest rates.

Data this morning support the negative story. Orders for durable goods—stuff meant to last for at least three years—fell 3.4% in December. That came on top of revisions that pushed durables orders down 2.1% in November. (The original estimate was for a 0.9% decline.)

A big part of the drop came from the always-volatile aircraft sector where orders fell 46.4% in December.

But the drop in aircraft orders wasn’t the only problem. Machinery orders fell 3.7% and orders for computers and electronic products dropped 1.3%. That led to a fourth consecutive monthly drop in orders for nondefense capital goods, excluding aircraft. The December and November declines were both 0.6%.

Worries that the decline in durables orders showed a fall off in exports, and in companies’ willingness to invest in expanding production, got support from disappointing quarterly results from Microsoft (MSFT) and Caterpillar (CAT).

For the December quarter, Microsoft reported a drop in licensing revenue from businesses to $10.7 billion. Wall Street had been looking for $10.9 billion. Microsoft pointed to slumping sales in China and Japan and the effect of a stronger US dollar as the reason for the decline. Going forward, the company said that a stronger US dollar would lower revenue in the upcoming fiscal third quarter by four percentage points. Shares of Microsoft closed down 9.25% today.

Caterpillar’s fourth quarter results fell short of estimates, but it was the company’s forecast for all of 2015 that did most of the damage as the stock fell 7.2% at the close. Fourth quarter earnings were just $1.35 a share, well short of the $1.55 projected by analysts. Revenue dropped to $14.2 billion from $14.4 billion in fourth quarter of 2013. For the full year, Caterpillar told Wall Street to expect earnings of $4.75 a share; that’s shockingly lower than the analyst consensus of $6.69 a share. Revenue will drop, the company said, to $50 billion versus the $55.2 billion consensus estimate, thanks to increasing weakness in sales to the energy industry and to a continuing slump in sales to mining companies. This forecast for 2015 is a huge step downward from guidance in October for flat to slightly higher 2015 sales.

At the close today in New York, the Dow Jones Industrial Average was down 1.65% or 291 points and the Standard & Poor’s 500 was lower by 1.34%.

Today is a snow day in New York, with much of Wall Street signing in from home. It’s not clear how that might be affecting trading volume and volatility ahead of tomorrow’s meeting of the Federal Reserve’s Open Market Committee. The Fed is not expected to announce any change in interest rates or in the factors that it’s looking at to determine when it might begin to raise interest rates. If there’s a risk in tomorrow’s meeting, it’s a chance that the Fed will say something to indicate that it’s more worried than in December about the global economy. The Fed futures market is currently pricing in a 68% chance that the Fed will raise its benchmark interest rate to 0.5% by December, according to Bloomberg. The Fed’s benchmark rate has been in a range of 0 to 0.25% since 2008.

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