An important economic report was released last week with data that raises concerns about the strength of the economy.
I’m talking about the monthly report from the Census Bureau on new orders for durable goods.
Durable goods are products designed to last at least three years. They include kitchen appliances, computers, and industrial machinery used in factories.
New orders for durable goods decreased 0.1% in July compared to June. This was better than expected. According to The Wall Street Journal, economists had expected a decline of 0.5%.
The report noted that, “The overall number was hurt by a 48.9% decline between June and July on new orders for nondefense aircraft and parts, a category that is often volatile.”
This was the second time in the past four months that new orders decreased.
Source: Federal Reserve
Trends in durable goods orders reflect consumer and business confidence. This is one of the few economic data reports that offer insights into both business and consumer finances. Consumers make big purchases when they’re optimistic about the future. That’s especially true for financed purchases like new appliances or cars. Financing shows confidence in the ability to make payments.
Pessimistic consumers delay purchases. Think of your own household. If you’re worried about losing your job, you probably avoid new debt. This idea applies to the larger economy because millions of households behave that way. These same factors affect business decisions as well. Businesses make big purchases when managers are optimistic and defer decisions when they are pessimistic.
This indicator also forecasts trends in the stock market. In fact, avoiding the stock market when new orders are lower than they were six months ago beats a buy-and-hold strategy. The Commerce Department began publishing this data in 1992. Selling when new orders fall avoided every significant decline since then.
New orders for durable goods are still bullish, but they’re warning that we are back to the type of environment we saw two years ago. Before the pandemic shut down the economy and government spending created a booming economy, growth was slow.
How I’m Investing Right Now
The stock market seems to be pricing in rapid economic expansion. If orders for durable goods decline, the bull market is likely to stall. This is an important indicator to watch in the coming months.
As I watch risks grow, I am turning to a stock that is considered by some to be recession proof.
That stock is Anheuser-Busch InBev SA/NV (NYSE: BUD) — the world’s largest beer company. The company is home to 500 different beer brands and a massive network of wholesalers and distributors.
Analysts have long argued that even in recessions, consumers spend money on essentials and vices.
Essentials like health care, food and cleaning products tend to maintain sales even when the economy struggles. Vices, like tobacco products and alcohol, also tend to maintain strong sales in tough economic times. This doesn’t mean companies grow in recessions. But stocks in these sectors do tend to hold up in tough times.
BUD is rebounding this year with earnings expected to grow more than 50% compared to 2020. In last year’s recession, it wasn’t the loss of income that hurt BUD’s sales as much as social distancing and the shutdown of bars and restaurants. Those conditions are unlikely to be repeated in the future, and the company is expected to grow earnings by an additional 17% next year.
Earnings, even at their current level, support the stock’s dividend, which is currently a little less than 2%.
BUD is a safe income stock in this market environment. And while most investors would simply buy the stock, hold it, and wait for the dividend, I recently told my Maximum Income subscribers about a much better plan…
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