Brian Jacobsen

Durable goods: 2013 favors some, but not all, businesses

AdvantageVoice® Blog—1-29-13
Brian Jacobsen, Ph.D., CFA, CFP®, Chief Portfolio Strategist

December’s Advance Report on Durable Goods from the Census Bureau showed a healthy 4.6% increase from November in new orders. Even excluding the volatile transportation component of the report, new orders increased 1.3%. Excluding defense, new orders increased 1.2%.

Defense made up approximately 5.2% of all new orders in 2012 (and 5.5% in 2011). Absent action by Congress and the president, defense spending could be cut by approximately $55 billion in 2013. As the deadline for a deal approaches, it appears likely that defense spending will be at least partially affected by the sequester.

Since the sequester caps budget authority and doesn’t immediately cut actual outlays, its effect on defense contractors will likely be smoothed out over the course of the year, showing up as a reduction in new orders and not necessarily a cancelation of existing orders. Stocks of companies with a lot of exposure to defense spending haven’t seemed to lag the overall market by much, so it’s possible that the market consensus is that the sequester won’t take place.

Offsetting any possible effects of the sequester on durable goods orders is the 50% bonus depreciation that businesses will be able to take for qualified property acquired and placed into service during 2013. “Qualified property,” as it is defined, likely won’t include commercial buildings and rental properties. Most durable goods, though, should qualify. This bonus could provide a boost to businesses that sell durable goods to other businesses. Although consumer spending could be somewhat squeezed by higher payroll taxes, and defense contractors could also feel a pinch, 2013 may favor manufacturers of durable goods—provided that the customer is another business.

The views expressed are as of 1-29-13 and are those of Chief Portfolio Strategist Brian Jacobsen, Ph.D., CFA, CFP®, and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.


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