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August 24, 2000

U.S. Durable Goods Orders Plunge
By Peronet Despeignes,

Slump in Demand Won't Stop Inflation's Steamroller! ... Weiss comments

WASHINGTON - Demand in the U.S. for big-ticket items such as cars, trucks and refrigerators has declined at the fastest monthly rate on record.

The Commerce Department said new orders for durable goods plummeted 12.4% from June to July to $212.4 billion. The backlog of orders dipped 0.3%. Shipments of durable goods slid 1.9%. The previous overall increase in orders in June was revised down slightly to 9.5%.

Orders for non-defense capital equipment such as computers -- a key gauge of business investment -- fell 12.3%, the largest drop since December 1997.

The factory orders data is often discounted because it is notoriously volatile from month to month, involving many bulk purchases of, for instance, jet aircraft by the military. But the overall drop in factory orders in July may be significant because it is unprecedented. This latest sign of an economic slowdown in the U.S. may substantially raise the odds of no change in official short-term interest rates by year-end.

While the news of a slowdown in durable goods orders points to an economic slowdown, it doesn't mean that an interest rate hike is out of the picture. Far from it. In fact, it will only lull careless investors and analysts into a false sense of optimism.

The truth is, other factors, such as skyrocketing oil prices, will have a much larger impact on inflation. Moreover, if this slump was truly good news, the market would leap with joy; instead, we get investor indifference and indexes meandering listlessly. It's not difficult to see why: As demand wanes for big-ticket items such as automobiles and large appliances, Wall Street worries about a drop in earnings and a dearth of profits for companies in the upcoming quarter. The market is squeezed by creeping inflation on one side and slumping demand on the other. This can mean only one thing -- more pain to come.

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