US: Durable Goods Orders

December 22, 2017 07:30 CST

Consensus Consensus Range Actual Previous Revised
New Orders - M/M change 2.0% 1.3% to 3.5% 1.3% -1.2% -0.4%
Ex-transportation - M/M 0.5% 0.3% to 1.1% -0.1% 0.4% 1.3%
Core capital goods - M/M change 0.4% 0.2% to 1.0% -0.1% -0.5% 0.8%
New Orders - Yr/Yr Change 8.2% 1.0% 1.9%
Ex-transportation - Yr/Yr 7.0% 7.4% 8.6%
Core capital goods - Yr/Yr 8.1% 8.1% 9.8%

A jump in aircraft skewed durable goods orders 1.3 percent higher in November which however is well below Econoday's consensus for 2.0 percent and no better than the low estimate. Orders for civilian aircraft, which have been solid this year, rose 31 percent and reflect Boeing's success at November's Dubai Air Show. But when excluding aircraft and other transportation equipment, orders slipped 0.1 percent in a drop offset however by a large upward revision to October's ex-transportation reading which now stands at a very strong 1.3 percent.

Weakness in the latest month and an upward revision to the prior month is also the story for core capital goods orders (nondefense ex-aircraft) which also slipped 0.1 percent in November but with October now up an impressive 0.8 percent. Shipments of core capital goods, which will be part of the business spending component of fourth-quarter GDP, are only moderate, up 0.2 percent and 0.3 percent in November and October respectively.

Both vehicle orders and vehicle shipments have been strong the past two reports, up 1.4 percent for each in November following 1.6 percent gains for each in October. Orders for electrical equipment, reflecting demand for both capital goods and construction, have also been strong as have orders and shipments for primary metals. Orders for machinery, computers and defense aircraft have been mixed.

Other data include a strong 1.0 percent rise in total shipments against only a 0.2 percent build for inventories which drives down the inventory-to-shipments ratio to a yet leaner 1.66 from 1.67. Low inventories in times of expanding demand are a positive for the production and employment outlooks. A disappointment in the report, as it has been all year, are unfilled orders which managed to inch only 0.1 percent in the month.

This is very much like this morning's personal income & outlays report, mostly strong but still not as strong as expected and with weak spots here and there. And like last week's release of the 0.2 percent gain for November manufacturing production, the data are pointing to a favorable but perhaps still moderate factory contribution to the fourth-quarter economy.

Market Consensus Before Announcement
Boeing orders from Dubai's air show are expected to help lift durable goods orders in November where the consensus calls for a 2.0 percent gain that would resume, after October's 0.8 percent dip, what had been a late-year burst of strength for the factory sector. Excluding transportation equipment, orders are expected to show less strength but at a still very solid 0.5 percent increase while core capital goods orders are expected to bounce back from an October decline with a 0.4 percent gain.

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. 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.