Robust is not an understatement for September's durable goods report, one headlined by a 4.7 percent monthly jump to a seasonally adjusted $297.2 billion that includes wide gains along with another surge in commercial aircraft orders. Excluding aircraft and other transportation equipment, orders rose a solid 0.5 percent for a second straight month, and when excluding aircraft and nondefense orders, core capital goods rose 0.6 percent on top of an upwardly revised 1.1 percent surge in August.

All these readings are well above consensus and together with a 4.9 percent climb in GDP also released at 8:30 ET leaves Econoday's Relative Performance Index at 29 to indicate that US economic data are handily beating expectations and point to tightening risk at next week's Federal Reserve meeting.

Commercial aircraft (nondefense aircraft and parts) jumped 92.5 percent in the month to $32.4 billion but it's machinery, up 0.9 percent at $38.1 billion, that reveals the fundamental strength of this report. Joining machinery is a 0.9 percent gain for fabrications to $36.3 billion, a 1.0 percent rise for computers and electronics to $24.9 billion and a 0.9 percent gain for electrical equipment to $14.5 billion. These gains echo the rise in machinery and are inputs into the capital goods group where ongoing strength points to rising business sentiment and lift the outlook for business investment.

Another key strength in this report is a 1.4 percent jump in unfilled orders that punctuates a run of gains tied directly to order backlogs for commercial aircraft that rose 3.2 percent in the month to $601.3 billion. Other details in September's report include a 0.3 percent decline for total shipments and a 0.1 percent rise for inventories; though both of these readings are subdued, the underlying strength in orders and backlogs points to higher shipments ahead and the need to build inventories as well as factory payrolls.

Forecasters see durable goods orders rising 1.0 percent in October following September's 0.1 percent increase. Ex-transportation orders are seen up 0.2 percent. Core capital goods orders are seen flat.

Durable goods orders are new orders placed with domestic manufacturers for factory hard goods. The report also contains information on shipments, unfilled orders and inventories. The advance release provides early estimates and is revised about a week later by the factory orders report.

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.