What the Durable Goods Orders Report Measures:
Durable goods are the long-lasting, more expensive items used by businesses, such as computer equipment, industrial machinery and raw steel. Durable goods orders also include really expensive items, such as steam shovels, tanks and airplanes. 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 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.
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:
Business 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.
Recent 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.
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. (Article updated March 21, 2011)
