Durable Goods News
The future is looking bright for businesses, as orders for durable goods rose .7% in June, to $239.9 billion. Most important, business orders for capital goods, like machinery and equipment, rose a healthy 1.8% to $82.3 billion.
The report also showed that shipments, which contribute to Q2 GDP, were up a scant 0.1% to $238.2 billion. That's because past durable goods orders were weak, and now the shipments of those orders are trickling through. Shipments grew just .1% in April, and fell .1% in May.
This means Q2 GDP growth may not be strong enough to counterbalance the 2.9% economic contraction in the first quarter, which followed disappointing holiday retail sales. However, strong orders in June could translate to a higher GDP report in the second half of the year if the trend continues. For more details, see the latest Durable Goods Order Report.
What Are Durable Goods?
Durable goods are long-lasting, more expensive items that last at least three years, and so aren't purchased very often. The most commonly talked about are manufacturers' orders for durable goods. These include business orders for machinery and equipment, such as computer equipment, industrial machinery and raw steel. It also include really expensive items, such as steam shovels, tanks and airplanes. In fact, commercial airplanes make up a large component of durable goods for the U.S. economy. Businesses only buy these big ticket items when they feel confident about the economy. When businesses are not confident, they put off buying durable goods until things get better.
If a large order for some of these items comes through one month, it can skew the month-to-month results. For that reason, many news releases show the durable goods orders report stripped of some combination of defense and/or transportation. Therefore, comparing month-to-month changes in durable goods is not as effective in predicting economic growth as comparing changes year-over-year. That’s because Gross Domestic Product, GDP, the measurement of the economy’s performance, is measured against last year. When the durable goods orders are compared to the same time last year, it's a very good predictor of the GDP growth rate.
Manufacturers' shipments of durable goods are also important. This isn't a leading indicator, but instead tells you how many orders have been manufactured and shipped. These statistics are included by the Bureau of Economic Analysis (BEA) report on GDP.
Consumer Durable Goods
The other category is consumer durable goods. These are the heavy-duty appliances bought by households and individuals. They include automobiles, dishwashers and washing machines. Shipments of these goods are also included in the GDP report.
Why the Durable Goods Orders Report Is Important
Orders for durable goods is the most important leading indicator. That's because consumers and businesses only order durable goods when they are confident the economy is improving. When the durable goods orders report trends up, that is an important early indicator that GDP growth will trend up also. This means you have a better chance of asking for that raise, and your stocks and mutual funds will increase.
When durable goods orders trend down, you should think about looking for another job, updating your skills, and increasing the percentage of cash or bonds in your retirement portfolio. That’s because when orders are drop off, economic growth is not far behind. The GDP growth report will also be down, causing stock market declines and recession.
How Durable Goods Orders Predicted the 2008 Recession
The Durable Goods Orders Report first hinted at the recession in October 2006, if measured year-over-year. However, steady declines in durable goods orders didn't occur until March 2008. Durable goods orders were down more than 20% year-over-year between December 2008 and July 2009.
The first clue that the economy was getting better was in September 2009, when durable goods orders were "only" down 23% from the prior year. This was better than March 2009, when orders were down almost 28% from the prior year. By December 2009, durable goods orders were only down 3% from the year before. In January 2010, durable goods orders were 13% greater than the year before. Durable goods orders have remained positive, year-over-year, since then. These orders will most likely continue to remain positive for the next 12 months.
How It Forecast the Rebound After 9/11 and Hurricane Katrina
The 2001 recession actually began in Q3 2000, when GDP declined .5%. The economy did not really come out of that slump until Q2 2003. That's when GDP growth broke above the 3% mark, remaining there until Q4 2005 and Hurricane Katrina. Durable goods orders closely mirrored that trend. In Q4 2005 orders increased, forecasting the GDP rebound in Q1 2006. Article updated July 25, 2014