Durable Goods Orders Report, News and How It Predicts the Future
Why Orders Fell 1.3 Percent in September
Orders for durable goods rose 1.3 percent in September. The increase was driven by a 17.5 percent drop in orders for commercial aircraft. This was offset by a 119.1 increase in orders for defense aircraft.
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 remains high as Boeing builds ever-more fuel efficient aircraft.
Over half of all airline orders are to replace existing planes. Boeing must overcome the strength of the dollar. That makes its products more expensive than its major foreign competitor, France's Airbus.
Capital Goods Orders
Capital goods are machinery and equipment used in everyday business. That gives a better picture of real business spending. That's because it removes the effects of large orders for defense, commercial aircraft, and automobiles.
Capital goods orders, excluding aircraft, fell 0.1 percent in September. But that's a 6.6 percent increase year-over-year. It's a strong signal of how much business confidence has increased 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 rose 1.3 percent in September. They rose 7.2 percent year-over-year. Durable goods shipments are a component of the nation's economic output. Its strength will probably translate into strong gross domestic product for the second quarter. The Bureau of Economic Analysis uses durable goods shipments as a base to calculate Fixed Business Investment. That comprises 18 percent of GDP. The most current GDP statistics usually reflect the durable goods performance during that quarter.
What Are Durable Goods
Durable goods are expensive items that last three years or more. As a result, companies purchase them infrequently. They include machinery and equipment, such as computer equipment, industrial machinery, and raw steel. They also include expensive items such as steam shovels, tanks, and airplanes. In fact, commercial planes make up a significant component of durable goods for the U.S. economy.
Businesses only buy these big ticket items when they feel confident about the economy. When companies are not sure, 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, look at the durable goods orders report without defense and transportation.
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. The GDP report also includes shipments of these goods.
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. That 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. That’s because when orders drop off, economic growth is not far behind. The GDP growth report could also be down, causing stock market declines and recession.
Durable Goods Orders Report Warned of the 2008 Recession
The Durable Goods Orders Report first hinted at the recession in October 2006, if measured year-over-year. Steady declines in durable goods orders didn't occur until March 2008. Durable goods orders were down more than 20 percent 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 percent from the prior year. That was better than March 2009 when orders were down almost 28 percent from the previous year. By December 2009, durable goods orders were only down 3 percent from the year before. In January 2010, durable goods orders were 13 percent greater than the year before. Durable goods orders have remained positive, year-over-year, since then.
The Report Predicted the Rebound After 9/11 and Katrina
The 2001 recession began in Q3 2000 when GDP declined .5 percent. The economy did not come out of that slump until Q2 2003. That's when GDP growth broke above the 3 percent mark, remaining there until Q4 2005 and Hurricane Katrina. Durable goods orders mirrored that trend. In Q4 2005 orders increased, forecasting the GDP rebound in Q1 2006.