Durable Goods Orders: In “stall speed”

What makes Durable Goods Orders a “high profile” indicator is that it can foreshadow significant changes in economic activity sooner than other statistics. That´s because it is about production that will take place in the months ahead.

It is important to keep in mind, however, durable goods orders are highly volatile month-to-month due, in large measure, to sudden large changes in orders for defense goods and aircraft. In order to get a better reading of demand in the business sector we must strip those volatile components out.

Doing so, we get a better gauge of consumer confidence. The 65% of durable goods orders that exclude defense and aircraft refer to mostly high priced consumer products – furniture, cars, electronic products, appliances and even boats – over which the consumer has some discretion as to the timing of purchases.

When consumers grow uneasy about the economy´s path, this is the first place they cut spending. Conversely, when such purchases rebound, it shows that households are sufficiently comfortable with their finances and employment prospects to resume spending again. A good sign for the industrial sector and even the economy as a whole.

The chart for the nominal value of Durable Goods Orders ex Aircraft and ex Defense shows that shortly after Janet Yellen took over the Fed, the level of orders dropped, stopping to worsen in the spring of 2016, when the Fed “relaxed” its tightening bias, and showing some positive gain with the “Trump (short term) Bounce”. The gains were not very significant and have stalled since.

Growth in nondefense capital goods orders excluding aircraft, one of the best leading indicators of business investment spending, is sensitive to monetary policy, falling strongly after mid-2014. “Relaxed” monetary policy and the election put a stop to the downward trend, but capital goods orders remain depressed, showing little traction.

The Commerce Department said it could not isolate the effects of Hurricanes Harvey and Irma, which hit the U.S. in late August and September, on the data released Wednesday. The Federal Reserve earlier said Hurricane Harvey contributed to a sharp decline in U.S. industrial production last month.

Harvey happened in the tail end of August. Very unlikely any effect shows up in the national data for August, especially if only manufacturing is considered. The Fed´s opinion is just another example of their preferred “it´s not my responsibility”!


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