Durable Goods Orders Report: News and How It Predicts the Future

Why Orders Rose 2.2 Percent in September

A Boeing DC 10 jet. Photo:Paul Chesley/Getty Images

Orders for durable goods rose 2.2 percent in September. That's after rising 2.0 percent in August and 6.8 percent in July. 

What's driving this growth? Orders for  commercial aircraft rose 31.5 percent. 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. 

Boeing said it expects to deliver between 760 and 765 aircraft in 2017.

That's more than the 748 delivered in 2016. It may even beat the record 762 planes delivered in 2015. 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 had a slight downtick in 2016 as the backlog from order to delivery rose to 10 years. Also, Boeing must overcome the strength of the dollar. That makes its products more expensive than its major foreign competitor, France's Airbus. (Source: "Boeing Expects to Deliver More Planes in 2017," CNBC, January 25, 2017.  "Boeing Dims Outlook, Pain Spreads Across Aerospace," NASDAQ, January 28, 2016.  "A Smoother Ride," The Economist, January 16, 2016.)

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, rose 1.3 percent in September. That's after a 1.3 percent rise in August.  Capital goods orders rose 3.8 percent year-over-year. That signals how much business confidence has increased in the past 12 months. It reveals that orders are much stronger than they were last year.

Comparing to last year removes the influence of seasonality on this month's numbers.

Four Reasons Why Capital Goods Orders Are Slowing

There has been a decline in orders over the long term. Since 2014 the strong dollar has taken a bite out of capital goods exports. That aggravates a longer-term trend of weak domestic demand. Companies have lots of cash but are putting it into share buybacks and mergers rather than investing in new equipment. 

Four long-term trends are also slowing growth. Part of the demand shortfall is due to income inequality. Another part is due to the low labor force participation rate. A third reason is the aging of baby boomers, who don't need to buy as much as much as they did when they were younger. Fourth, households are still recovering from the 2008 financial crisis and the Great Recession.


Manufacturers' shipments of durable goods are also important. Shipments aren't a leading indicator. Instead, they tell you how many orders manufacturers have shipped. 

Shipments of durable goods rose 1.0 percent in September. They rose 3.4 percent year-over-year.

Durable goods shipments are a component of the nation's economic output. But it's strength did not translate into strong gross domestic product for the first quarter.

The Bureau of Economic Analysis uses durable goods shipments as a base to calculate Fixed Business Investment. That comprises 17 percent of GDP. Here are the most current GDP statistics

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. 

It Predicted the Rebound After 9/11 and Hurricane 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.