An off-beat economic indicator is signalling a recession.
The “McCulley indicator” — which measures “core” capex orders, or orders of capital goods excluding military orders and planes — is now at its lowest level since 2009. The indicator is named for former PIMCO managing director Paul McCulley, who views it as a leading recession indicator.
Tuesday’s durable goods orders report showed that in September, “core” capex orders declined 7.9% compared to the prior year, a six-year low. The 3-month moving average of this measure also declined to -5.9% in September, the lowest in years.
Essentially, it’s not good news if companies are slowing down their investments in equipment that would keep production going in the future.
“With orders down a further 0.3% [month-on-month] in Sep., what had looked like an incipient recovery in core capital goods orders now looks like flat trend,” wrote Pantheon Macroeconomics’ Ian Shepherdson in a note following the report.
“That’s still a vast improvement, though, after the 8.9% drop between Sep and Feb, as oil companies slashed their spending.”
The overall durable goods data were not great and reflected the continued weakness in the manufacturing sector.
It’s worth noting, however, that the indicator fell below zero in 2012.
There was no recession then.