Last Friday, the Commerce Dept. released its monthly analysis on one of the most watched indicators of economic health in the US – durable goods orders. Durable goods are items that are expected to last at least 3 years or more. They range from consumer goods like home appliances and computers to commercial items such as aircraft and turbines (these are known as capital goods).
Why Is This Report So Important?
The reasoning behind the importance of durable goods is fairly intuitive. These items tend to be higher in price than other more common goods (e.g. consumer staples) and, therefore, require a greater investment from buyers. Consequently, buyers are likely to buy these goods only if they have confidence in their ability to pay for them. Furthermore, especially in the case of consumer durable goods, many of these items are discretionary in nature (you generally buy a new dishwasher if you want one, not absolutely need one). So the orders for these goods provide key insights as to the confidence of consumers at both the individual and commercial level.
The Numbers
The overall number released on Friday indicated that orders fell 1.4% in August. However, when looking deeper into the numbers, you find that if you exclude transportation items (i.e. aircraft which are generally very volatile), the orders rose a more than expected 4.1%. This gave investors some confidence that consumers and companies were increasing their spending and provided them hope for an economic recovery.
The numbers break down as follows:
· Electronics: +3.8%
· Machinery: +3.9%
· Transportation: -10.3%
My Take
Overall, I think the number is pretty solid. I’m especially encouraged by the broad-based growth in all categories (I’m not too worried about transportation because of its volatility – last month it was up 11.6%). If these numbers can keep growing, it should soon be evident that there is demand in the economy and, hopefully, this will result an increase in employment as durable makers adapt to meet this demand.
However, there is one variable that I’m keeping a close eye on before declaring any sort of victory. The inventory levels at these durable goods companies needs to be watched closely. Last month, those levels rose .4% and were up .6% in July. Although these aren’t huge numbers, there is definitely an upward trend. If it turns out that the durable goods growth is more of an anomaly, this growth in inventory may become a big liability for the producers. Next month, I want to see if this inventory trend continues – if it does, I feel it will act as a leveraging mechanism for the companies.
I feel the economy still has a long way to go before it can fully recover. With housing still remaining weak and a lack of hiring, a strong durable goods number can easily turn out to be a blip in the overall picture. However, if these good numbers become the trend, then I think the affect will trickle down to employment and hiring and, in turn, promote some badly needed GDP growth.
What are your thoughts?
Questions/Comments/Feedback?
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The Standard Disclaimer:
The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I've said above. This includes consulting with a financial advisor.
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