What Are Durable Goods Orders?
Durable goods orders is an extensive monthly survey conducted by the U.S. Census Bureau. These orders measure current industrial activity, providing vital insight used as an economic indicator by investors.
Key Takeaways
- Durable goods orders measure industrial activity and serve as an economic indicator for investors.
- These orders provide more understanding of the supply chain relative to most indicators, aiding in industry earnings forecasts, especially in machinery, technology manufacturing, and transportation sectors.
- High numbers in durable goods orders signify an economic upswing, while low numbers indicate a downward trend.
Demystifying Durable Goods Orders
Durable goods orders encompass new orders placed with domestic manufacturers for delivery of long-lasting manufactured goods in the near or distant future. The total value of these orders is calculated and made public through two monthly releases: the advance report on durable goods and the manufacturers’ shipments, inventories, and orders report.
Durable goods comprise expensive items like machinery and equipment with a lifespan extending three years or more. Examples include computer equipment, industrial machinery, and commercial airplanes, which form a significant portion of the U.S. economy.
Massive orders for items like airplanes can skew month-to-month results, prompting analysts to often review durable goods orders separate from defense and transportation sectors for a more realistic overview.
How the Data Is Utilized
As a critical economic indicator, durable goods orders allow investors to monitor and gauge economic health. Investment prices respond to economic growth, making it vital for investors to discern these trends. For instance, a surge in orders suggests a busier future for factories, potentially leading to more employment.
Typically, businesses and consumers purchase durable goods when they are optimistic about economic improvements. Consequently, an increase reflects an upward economic trend and may indicate impending hikes in stock prices.
Durable goods orders offer predictive insights into the manufacturing sector, a crucial economic segment, and are invaluable for understanding the earnings potential in industries like machinery and technology manufacturing.
Considering that the manufacturing lead time on capital goods tends to be longer, new orders present a long-term view of potential sales and earnings. Investors and analysts usually rely on several months’ data averages due to the sometimes volatile nature of this data.
Special Considerations
Global-scale manufacturing is significantly impacted by factors like trade wars, which can result in reduced spending on new equipment and appliances as a business retrenches.
For instance, U.S. manufacturers sourcing raw materials from abroad or assembling products overseas could face substantial repercussions from tariffs, leading to a domino effect of lower expenditure due to psychological business impacts.
Illustrative Example: A Sharp Decline
In December 2007, spurred by tax cuts and a relaxed monetary policy, durable goods orders peaked. However, between December 2007 and March 2009, they fell drastically by 38%, attributed to the Great Recession.
During the recession, businesses slashed investments in new equipment and technologies owing to dwindling demand from financially constrained consumers.
Related Terms: Economic indicator, Growth, Economic health, Supply chain.
