What the Durable Goods Orders Report Measures:
Durable goods are the long-lasting, more expensive items mostly used by businesses. The report measures orders for things like computer equipment, industrial machinery and raw steel. It also includes really expensive items, such as steam shovels, tanks and airplanes. 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 order stripped of some combination of defense and/or transportation.
However, the month-to-month changes in durable goods is not nearly as effective in predicting a trend as the year-over-year changes. That’s because 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 is a very good predictor of the GDP growth report that comes out when the quarter ends.
For that reason, this article only discusses year-over-year trends. This is different from most news releases, which report month-to-month changes.
Why the Durable Goods Orders Report Is Important:
When durable goods orders are up, then you have a better chance of asking for that raise, and your stocks and mutual funds increase. That’s because businesses are confident, the money is rolling in for new orders, and the next quarterly GDP report will be upbeat.
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.
Recent Durable Goods Orders Trends:
The Durable Goods Report first hinted at the current 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 have been down more than 20% from the prior year since December 2008.
Durable Goods in the 2001 Recession:
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.
The Durable Goods Orders Outlook:
Since durable goods is such an early indicator, there are few other indicators to use that can predict where it will go. A glimmer of hope appeared in September 2009 when orders were "only" down 23% from the prior year. This is a tad better than the August decline of 26%, and July's drop of 24%. However, consumer spending and bank lending need to further improve before manufacturers will really start ordering again. Updated October 28, 2009
