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Durable Goods Report: An Overview on Reading it

Release Date: Around 20th of each month
(For Durable Goods report)

As is usually the case with these monthly economic reports, most market observers only see the most abbreviated version of this report, which looks something like the short version reported in the media on May 26, 2015: 

 PriorPrior RevisedConsensusConsensus RangeActual
New Orders - M/M change 4.0 % 5.1 % -0.6 % -3.0 % to 1.8 % -0.5 %
Ex-transportation - M/M -0.2 % 0.6 % 0.4 % -0.2 % to 1.0 % 0.5 %

Despite numbers that most would consider lackluster for a bull market, many viewed this report as somewhat of a relief. The past winter was rough. The strong dollar was weighing on many large cap companies. And many companies in the energy sector had long since ceased capital spending. One might easily have expected something much worse. In fact, the Treasury bond markets’ interest rates jumped substantially on the news.

The longer term durable goods picture was, at first glance, not great either. Data experienced a great spike of 23% in August, 2014 and has trended down ever since, basically hugging the flat line since November, 2014. How is it that the durable goods number spiked so enormously eight months previously? Boeing received an aircraft order worth $55 billion. This is an extreme example but in many ways typical; aircraft orders often distort the longer term trend, so many analysts also scrutinize these numbers in a format that takes out the data from the transportation and/or defense sectors.

Despite the middling news, many veteran commentators and analysts also came to upbeat conclusions. Paul Ashworth of Capital Economics echoed the sentiments of many when he commented, “The anticipated pick-up in the growth rate of business investment in equipment in the second quarter appears to be firmly on track.” To some extent, this optimism can be understood as analysts having become accustomed to the wild volatility of these numbers. Often these numbers revolve around the flat line vaguely like an oscilloscope. So after March, 2015’s revised month-on-month change was +5.1%, many observers were relieved that the report didn’t “give back” more than -0.5% in April, the way it had on many previous occasions.

Composition and Method

Around the 20th of every month the U.S. Census Bureau releases the full “advance release” of the Durable Goods Orders report. This report is the result of data received from some 5,000 manufacturers.  It generally covers more expensive useful goods that typically last at least three years. These orders are reported in their dollar value. Sometimes these orders are cancelled before they are filled; however, experience has shown that this report has served as a good leading indicator for the sectors that it covers. In fact, some of this data comprises part of the Conference Board’s Index of Leading indicators.

The complete report from the Census Bureau gives the value of these orders in dollars, with year-over-year changes as well as month-over-month changes. Approximately two weeks after this advance durable goods number, new data is added to these reports, as well as new revisions, and much of this report reappears as the Census Bureau’s “Factory Orders” report.

The Census Bureau’s longer version of the durable goods report also contains a section on “Unfilled Orders.” This is one way to measure the report’s current level of efficacy in forecasting changes in durable goods manufacturing. In May, 2015, we see that unfilled orders have been down four of the last five months, trending in the right direction. The news was more dire, however, for inventories. In the paragraph devoted to “Inventories,” the report states that durable goods inventories were up 24 of the last 25 months and were currently at $401.5 billion. This is the highest level since this report began in 1992. If these high inventory figures are indicative of historical patterns, this could be bad news for durable goods manufacturers and for those who sell their wares.

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