Durable Goods and How It Differs From Nondurable Goods
What Durable Goods Tells You About the Future
Durable goods are expensive items that last three years or more. Businesses and consumers only buy these big-ticket items when they feel confident about the economy. When they are not sure, they put off buying durable goods until things get better.
The Bureau of Economic Analysis (BEA) measures durable goods as part of its quarterly U.S. gross domestic product report. It's an important component of GDP. The BEA releases the current GDP statistics report for each quarter.
Types of Durable Goods
There are three types of durable goods, according to the BEA.
Consumer Durable Goods
Consumer durable goods are the items bought by households and individuals that last three years or more. They include automobiles, appliances, furniture, tableware, tools and equipment, sports equipment, luggage, telephones and electronics, musical instruments, books, and jewelry. The category also includes some intangible products such as software.
Business Durable Goods
Examples of durable goods used by businesses are machinery and equipment. Some are similar to consumer durable goods, such as computers, telephones, and automobiles. It includes furniture used by the business including any that landlords rent to tenants.
Durable goods used by businesses also include industrial equipment such as engines, metalworking machinery, and electrical transmission apparatus. It includes trucks, buses, boats, and aircraft. In fact, commercial aircraft is a large component of durable goods.
Nondurable goods last less than three years on average. The BEA includes in this category food, pharmaceuticals, tobacco, clothing, household supplies, personal care products, magazines, and gasoline.
Durable Goods Orders Report
Orders and shipments of durable goods are reported by the BEA monthly. Orders for durable goods an important leading indicator. When these orders increase, it means the economy is improving. It also 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 or updating your skills. You might also increase the percentage of cash or bonds in your retirement portfolio. When orders drop off, economic growth is not far behind. The GDP growth report could also be down, causing stock market declines and recession.
Current Durable Goods Orders
Orders for durable goods rose by 11.2% in July 2020. Orders have been rising since an 18.1% drop in April. Companies shut down then in response to the COVID-19 pandemic. Despite the increases, orders are still 12.1% lower year-over-year.
Much of the increase was due to a 21.9% rise in new orders for motor vehicles and parts.
That, and other increases, offset a drop in orders for commercial aircraft and parts. The Boeing aerospace company makes up the lion's share of commercial aircraft orders. The company's orders have a volatile impact on the durable goods report. Demand from airlines had been in question after two Boeing 737 MAX planes crashed in March and October 2019, killing 346 people.
Over half of all airline orders are to replace existing planes. Boeing must also overcome the strength of the dollar. That makes its products more expensive than its major foreign competitor, France's Airbus.
Capital goods are machinery and equipment used in everyday business. That gives a better picture of real business spending. It removes the effects of large orders for defense, commercial aircraft, and automobiles. If a large order for some of these items comes through one month, it can skew the month-to-month results.
For that reason, look at the capital goods orders report without defense and transportation.
Capital goods orders, excluding aircraft, rose by 1.9% in July. That's still a 1.9% drop year-over-year.
It signals how much business confidence has decreased in the past 12 months. Comparing this month's numbers to last year removes the influence of seasonality.
Manufacturers' shipments of durable goods are also important. Shipments aren't a leading indicator. Instead, they tell you how many orders manufacturers have already shipped.
Shipments of durable goods increased by 7.3% in July. That's a 9.4% decline year-over-year.
Durable goods shipments are a component of GDP. Its weakness will probably translate into a continuation of the economic contraction for the third quarter of 2020. The economy contracted 5% in the first quarter, kicking off the 2020 recession. It contracted a record 31.7% in Q2.
How the Durable Goods Orders Report Predicts the Future
The Durable Goods Orders Report first warned of the 2008 financial crisis in October 2006. It showed that orders were lower than the prior year. 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.
That was better than March 2009 when orders were down almost 28% from the previous 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.
The Durable Goods Order Report also warned of the 2001 recession. It began in Q1 2001 when GDP declined by 1.1%. Although the recession ended in Q4 2001, the economy did not come out of a slump until Q1 2002. That's when GDP growth broke above the 3% mark. It remained strong until Q4 2005 and Hurricane Katrina. Durable goods orders mirrored that trend. In Q4 2005 orders increased, forecasting the GDP rebound in Q1 2006.
Bureau of Economic Analysis. “Glossary.” Accessed June 3, 2020.
Bureau of Economic Analysis. “Chapter 5: Personal Consumption Expenditures, Page 5-4.” Accessed June 3, 2020.
Bureau of Economic Analysis. “Appendix: Summary National Income and Product Accounts, Page 6.” Accessed June 3, 2020.
Bureau of Economic Analysis. “Chapter 6: Private Fixed Investment.” Accessed June 3, 2020.
U.S. Census. "Monthly Advance Report on Durable Goods Manufacturer's Shipments, Inventories, and Orders." Accessed August 29, 2020.
CNBC. “Airlines Warn of Cancellations as Boeing Readies 737 MAX Software Fix.” Accessed June 3, 2020.
Bureau of Economic Analysis. “National Income and Product Accounts Tables: Table 1.1.1. Percent Change From Preceding Period in Real Gross Domestic Product.” Accessed August 29, 2020.