Traders and economists all look at economic indicators to help determine what direction the economy is going. Often, the reports you see on television and in news articles can be misleading or not tell the entire story. In order to know exactly what a report is saying about the economy you need to understand what data goes into each indicator and what it means for business, regulators and stocks.
One of the leading economic indicators is the durable goods report. This number is released by the U.S. Census Bureau around the 20th of every month and contains data for the previous month. Also known as the Advance Report on Durable Goods Manufacturer’s Shipments, Inventories and Orders, the report states new order data from over 4000 manufacturers of durable goods. Durable goods are generally higher priced products that have a “useful” life of more than three years. Some examples of durable goods would be cars or refrigerators. Non-durable goods would be gasoline or food.
Several valuable aspects of the report are that is supplies information on inventories, shipments, unfilled orders, industry breakdowns and other forward looking data. The industry breakdown is very meaningful because the overall number can be very volatile when sectors like airlines or military and government orders are factored into it. Durable goods such as airline and vehicle orders both from the government and the private sector usually come in bulk orders and can skew the number giving an unrealistic view of overall spending in the manufacturing component of the economy. Additionally, prices for these goods are generally much higher than in other sectors and can therefore dramatically change the final number. To get the most accurate view of the number many traders with remove defense and transportation orders from the overall number.
Since this number is so volatile and the report does not provide a statistical standard deviation, there are other methods that experienced traders and market watchers will use to get an accurate picture. When analyzing the number a trader should always use moving averages of varying time lengths to determine trends. Instead of comparing the number month to month, traders should use year over year comparisons and year to date estimates. Revisions to previous numbers are also included in the report and very large changes should be looked at closely.
So as an investor what should you take away from this report? Economists look at this report not only in the nominal terms of orders, but also as a condition of business as a whole. This number is a leading indicator of capital spending and industrial production and is a window into the manufacturing sector which is one of the largest components of the economy. The capital goods figures are representative of business upgrades that companies are spending money on and may show either an increase or decrease in the confidence they have in business conditions. This will affect sales at different points in the supply chain and hours worked in non-farm payrolls.
So how do the markets trade on this report? A weak durable goods number can be an indication of a weakening economy or dip in the business cycle so bonds will typically rally, while the stock market may fall. While a strong number should have an inverse effect and signify a strengthening economy. The value of durable goods and the increase or decrease in orders can also provide valuable insight into future earnings of companies specifically in the machinery, technology, transportation and manufacturing sectors.