Wow! Business orders for durable goods took a surprising hit in August, dropping a stomach-churning 13.2%. One reason was seasonal -- Boeing sold a slew of airplanes at the Paris Air show in July, so orders were expected to be slow in August. However, orders for automobiles and defense equipment were also down in August. The only bit of good news? Orders for regular business equipment was up a bit -- 1.1%, after dropping 5.2% in July and 2.7% in June. (Source: Census Bureau, Advance Report on Durable Goods, September 27, 2012; Marketwatch, Durable Goods Orders Sink 13.2% in August, September 27, 2012)
The Census Bureau's report on business orders for machinery, automobiles and equipment is one of the most important leading economic indicator. The dramatic drop in orders reveals a corresponding decline in business confidence. Business owners are delaying purchases of big ticket items until at least the Presidential election in November. Businesses are waiting to find out whether taxes will be raised or lowered, whether Obamacare will be implemented or eliminated, and where Federal government spending cuts will take place.
While orders for durable goods is a leading indicator, shipments of durable goods can predict the current quarter's Gross Domestic Product (GDP). Unfortunately, shipments were down 3% in August. This means the third quarter GDP growth rate will probably drop -- hopefully not much more than the extremely slow 1.3% growth rate in the second quarter.
What This Means for You
After the election, expect the economy to improve and the durable goods report to reflect that. Why? Businesses managers will be able to plug in tax rates and expenses into their operational plans. This certainty will boost economic growth no matter who wins.
- Durable Goods as a Component of GDP
- Why You Should Follow Leading Economic Indicators
- Romney and Obama's Economic Plans