US Durable Goods Orders Preview: Positive omens

The US Census Bureau will release its report on Manufacturers New Orders for Durable Goods in June on Wednesday July 25^th at 8:30 EDT, 12:30 GMT

Forecast

Durable goods orders are predicted to increase 0.7% in June after falling 1.3% in May.  Orders excluding the transportation sector will rise 0.2% following May’s revised 0.4% gain—originally 0.3%. Orders ex- Defense Department procurement are expected to rise 1.3% following the revised May drop of -0.5%--originally -0.6%.  Non-defense capital goods orders excluding aircraft and parts, the proxy for business spending are forecast to rise 0.2% in June after May’s revised 0.5% increase—originally 0.4%.

Durable goods

Durable goods are a component of retail sales. They are limited to products that are intended to last three years or more in normal use. Its items range from consumer products like automobiles, computers and exercise equipment to business assets like commercial aircraft and construction machinery whose productive lifespan may be in decades.

The demand for durable goods is less frequent and more flexible than standard products and they trends are a view into the long term planning of businesses and households.

The headline durable goods orders figure is a volatile category primarily because it includes the commercial airplane business of Boeing Company of Chicago. The 737 Max, until its grounding the company’s most popular aircraft, ranges in list price from $92.2 million to $119.2 million.  As airlines buy multiple aircraft in one order the monthly variation in the company’s orders and the huge amount of each purchase deal can mask underlying activity in the overall sector. 

Over the first five months of the year the range in durable goods orders has been from -2.1% to 2.7% but the average has been just -0.38%.

Durable goods orders ex-transport which leave out commercial aircraft essentially Boeing’s aircraft business, is a less volatile measure and a more stable indication of overall consumption trends.  From January the range has been 0.4% to -0.1% with an average of 0.16%.

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Durable goods and business spending

The Census Bureau’s category that is often used as an approximation for business capital spending, non-defense capital goods ex aircraft and parts is simply put business purchases without government defense spending and minus commercial aircraft.

Business capital spending is both an important contributor to economic activity and an indicator of future activity. Equipment and capital investment necessarily attempts to anticipate consumer spending six to 12 month or longer in the future. It volatility has been about mid-way between the overall and ex-transport statistics. The range has been from -0.9% to 1.3% with an average of 0.32%.

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Retail Sales and consumer sentiment

Consumer spending as tracked by the Census Bureau ‘control group’ category which informs the GDP calculation has increased for four straight months to June and five out of six months this year averaging 0.9% each.

Consumer sentiment has also been strong. The Michigan Survey reading of 98.4 in July while below the peak of 100.0 in May is commensurate with the readings in 2018 which were the best in two decades.

Retail sales and consumer sentiment are not a wholly reliable guide to the large purchase items that largely comprise durable goods orders. Durable goods for households and businesses tend to follow an internal replacement cycle. Nonetheless the excellent job market, rising wages and general satisfaction in households and the steady gains in consumer spending for businesses are positive trends.

There is nothing in the economy inhibiting the purchase of a new car or that extra computer, in fact, such will probably be accelerated.  If consumers are spending then business will not be far behind.