US: Durable Goods Orders


Thu Mar 24 07:30:00 CDT 2016

Consensus Consensus Range Actual Previous Revised
New Orders - M/M change -3.0% -6.0% to 0.2% -2.8% 4.9% 4.2%
Ex-transportation - M/M -0.2% -1.0% to 0.8% -1.0% 1.8% 1.2%
Core capital goods – M/M change -1.8% 3.9% 3.1%
New Orders - Yr/Yr Change 1.8% 1.8%
Ex-transportation - Yr/Yr -0.5% -0.6%
Core capital goods – Yr/Yr -0.1% -2.8%

Highlights
The manufacturing component of the industrial production report pointed to February strength but the durable goods report certainty isn't. Orders fell 2.8 percent with the ex-transportation reading, which excludes the up-and-down swings of aircraft orders, down a very sizable 1.0 percent. And capital goods readings, which offer indications on business investment, are once again in the minus column, down 1.8 percent for orders and, in a reading that will pull down first-quarter GDP estimates, were down 1.1 percent for shipments.

Total shipments fell a very sharp 0.9 percent with unfilled orders also very weak, at minus 0.4 percent in a reading that is not promising for manufacturing employment. Inventories, at minus 0.3 percent, are coming down but not fast enough with the inventory-to-shipments ratio up one notch to 1.65.

A positive is that year-on-year rates, benefiting from easy comparisons against the even sharper declines this time last year, are improving. Total orders are up 1.8 percent year-on-year with ex-transportation down 0.5 percent for the best readings since the 2014 collapse in oil prices and declines in energy equipment first hit the sector.

This report is always volatile and the weakness in February does follow even greater strength in January, but January now looks like an odd outlier for a sector that, up until last month at least, has been struggling with weak exports and weak demand for energy equipment.

Market Consensus Before Announcement
Indications on the factory sector had been weak going into 2016 but the manufacturing component of the industrial production report showed life in both January and February while durable goods orders showed broad gains in January. But forecasters do not see durable orders extending the improvement in February with the consensus at minus 3.0 percent and at minus 0.2 percent for ex-transportation orders. Core capital goods orders did bounce back solidly in January but a resumption of weakening is the call for February, weakening that could lower expectations for first-quarter business investment. Even if the report does prove weak, the ongoing decline in the dollar points to a lift ahead for exports.

Definition
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.




Description
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.

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

Interpretation
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.