US: Durable Goods Orders

Wed Dec 23 07:30:00 CST 2015

Consensus Consensus Range Actual Previous Revised
New Orders - M/M change -0.5% -1.7% to 1.1% 0.0% 3.0% 2.9%
Ex-transportation - M/M 0.0% -0.3% to 0.8% -0.1% 0.5%
Core capital goods – M/M change -0.4% 1.3% 0.6%
New Orders - Yr/Yr Change 1.2% 0.5% 0.4%
Ex-transportation - Yr/Yr -1.9% -2.4%
Core capital goods – Yr/Yr -1.8% 0.4% -0.2%

October was a rare good month for the factory sector, not November where manufacturing production in the industrial production report was no better than unchanged and now new orders were also unchanged. Excluding transportation, orders dipped into the minus column though just barely at minus 0.1 percent.

Capital goods had turned higher in October but, once again, November is a different story with core orders down 0.4 percent and October's gain shaved in half, and more so from plus 1.3 percent to a revised plus 0.6 percent. Year-on-year, core orders are down a very weak looking 1.8 percent. Core shipment data are also in the negative column, at monthly losses of minus 0.5 percent and minus 1.0 percent for the last two months which is a very poor opening for fourth-quarter business investment.

Outside of core capital goods, shipments in this report did show strength, up 0.9 percent vs, however, a 1.2 percent drop in October. Inventories fell 0.3 percent as manufacturers, facing soft demand, continue to work their stocks lower. The inventory-to-shipments ratio fell 2 notches to a less heavy 1.64. In another positive, unfilled orders rose for a second month, up 0.2 percent following October's 0.3 percent gain.

Turning to industry data, vehicle orders bounced back, aircraft orders swung lower while electrical equipment, belying construction strength, fell for a second month. Machinery orders were down as were orders for primary metals.

The factory sector, held down by weak exports and weak energy-related demand, appears to be finishing up a soft 2015 on another soft note.

Market Consensus Before Announcement
The factory sector bounced back strongly in October with durable goods orders jumping 3.0 percent and up a solid 0.5 percent excluding transportation. Capital goods highlighted the report with core orders up 1.3 percent and a decline in the prior month revised away to a 0.4 percent gain. But forecasters don't see another month of strength for November with the Econoday consensus calling for a 0.5 percent decline in headline orders with ex-transportation orders no better than unchanged.

Durable goods orders reflect the new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods. The first release, the advance, provides an early estimate of durable goods orders. About two weeks later, more complete and revised data are available in the factory orders report. The data for the previous month are usually revised a second time upon the release of the new month's data.

Durable goods orders are available nationally by both industry and market categories. A new order is accompanied by a legally binding agreement to purchase for immediate or future delivery. Advance durable goods orders no longer include data on semiconductors since semiconductor manufacturers stopped releasing this information to the Census Bureau.

The advance durable goods report also contains information on shipments, unfilled orders and inventories. Shipments represent deliveries made, valued at net selling price after discounts and allowances, excluding freight charges and excise taxes. Semiconductor data are available for shipments and inventories. Unfilled orders are those received but not yet delivered.

In 2001, the Census Bureau shifted from the standard industrial classification (SIC) system to the North American Industrial Classification System (NAICS). This caused some realignment of major industry classifications. Given the significant revisions incurred, the historical data now begin in 1992.

Investors want to keep their finger on the pulse of the economy because it usually dictates how various types of investments will perform. Rising equity prices thrive on growing corporate profits - which in turn stem from healthy economic growth. Healthy economic growth is not necessarily a negative for the bond market, but bond investors are highly sensitive to inflationary pressures. When the economy is growing too quickly and cannot meet demand, it can pave the road for inflation. By tracking economic data such durable goods orders, investors will know what the economic backdrop is for these markets and their portfolios.

Orders for durable goods show how busy factories will be in the months to come, as manufacturers work to fill those orders. The data not only provide insight to demand for items such as refrigerators and cars, but also business investment such as industrial machinery, electrical machinery and computers. If companies commit to spending more on equipment and other capital, they are obviously experiencing sustainable growth in their business. Increased expenditures on investment goods set the stage for greater productive capacity in the country and reduce the prospects for inflation.

Durable goods orders tell investors what to expect from the manufacturing sector, a major component of the economy, and therefore a major influence on their investments.

Durable goods orders are a leading indicator of industrial production and capital spending.

The bond market will rally (fall) when durable goods orders are weak (strong). A moderately healthy report for new orders bodes well for corporate profits and the stock market, however. Durable goods orders are one of the most volatile economic indicators reported in the month and this series can be revised by significant amounts from one month to the next. More than any other indicator, it is imperative to follow either three-month moving averages of the monthly levels or year-over-year percent changes. These adjustments smooth out the monthly variability and provide a clearer picture of the trend in the manufacturing sector.

Whenever economic indicators are particularly volatile, it becomes customary to exclude the more variable components from the total. For instance, market players exclude defense orders and transportation orders from durable goods because these fluctuate more than the overall total. Incidentally, aircraft orders are the guilty culprit, which are included in both of these categories. Airplanes are ordered in quantity, not one at a time. Analysts exclude the categories containing aircraft orders because they obscure the underlying trend, not because the aircraft industry is unimportant.

Economists closely watch nondefense capital goods orders as a leading indicator of capital spending. Typically, traders follow the special series for nondefense capital goods excluding aircraft because it shows the underlying trend for equipment investment after discounting sharp swings from aircraft orders.

Durable goods orders are measured in nominal dollars. Economic performance depends on real, rather than nominal growth rates. One can compare the trend growth rate in durable goods orders with that of the PPI for finished goods to assess the growth rate in real orders.