• Durable goods orders expected to return positive in May
  • Three months of headline volatility predicted to subside
  • Durable goods orders from consumers and businesses are cautious

The US Census Bureau will release its report on Manufacturers New Orders for Durable Goods in May on Wednesday June 26th at 8:30 am EDT, 12:30 pm GMT

Forecast

Durable goods orders are predicted to gain 0.2% in May after falling 2.1% in April. Orders ex-transport are expected to increase 0.1% after a flat April. Orders outside of government defense procurement are expected to rise 1.4% following the April 2.5% decline. Non-defense capital goods orders excluding aircraft and parts, a proxy for business investment are forecast to rise 0.1% after April’s 1.0% drop.

Durable Goods and Retail Sales

Durable goods are the long-lived component of retail sales, which is about one-third of all consumer spending.  Covering items as diverse as commercial airplanes, toasters, computers and garden hoses the only connection among its myriad products is that they are designed to last three years or more in normal use.  Durable goods are by nature purchased less frequently and with less necessity giving a view into longer term business and household financial planning and outlook.

The headline durable goods orders figure is a volatile category primarily because it includes the aircraft business of Boeing Company of Chicago. The size and monthly variation in the company’s orders can mask underlying activity in the overall sector. This year orders have risen 0.4% in January, fallen 1.6% in February, jumped 2.7% in March and dropped 2.1% in April. The January and February and perhaps March numbers may have had reporting issues associated with the partial government shutdown in late December and January but the volatility is, to borrow a phrase, the Chicago Way.

FXStreet

Durable goods orders ex-transport which excludes commercial aircraft and parts, in practice Boeing’s aircraft orders, is a less variable category and a better reflection of general trends in spending.  Over the past four months starting in January they have been -0.1%, 0.1%, 0.4% and 0.0%.

FXStreet

Durable goods orders and business

The rather exhaustively named category durable goods orders non-defense capital goods ex-aircraft is an often used proxy for business spending.  Simply put it is investment spending, ‘capital goods’ without government defense spending and Boeing’s commercial airplane business.  Business is an important contribution to economic activity and it is also an indicator as it attempts to anticipate consumer spending six to 12 months in the future.  The volatility this year has been mid-way between the overall and ex-transport categories: from January, 0.8%, -0.1%, 1.3%, -0.9%.

FXStreet

Business sentiment as given in the ISM indexes has recovered somewhat from its sharp decline over the past six months but it remains to be seen if the better attitude will translate into investment.

Durable Goods and the consumer economy

Consumer sentiment is not a reliable guide to large item purchases, many but not all of which are durable goods.  When sentiment falls sharply, as it did in the financial crisis purchases of durable goods (ex-transport) households put off buying a new car or a new air conditioner. But when sentiment recovers, purchases do not follow beyond a certain level they seem to be restrained also by need.

From the middle of 2016 onward, the Conference Board consumer sentiment index soared from 92.4 in May to 137.3 in September 2018, a 48.5% jump in optimism.

Durable goods purchases did increase 1.4% in October 2017 and 1.9% in April 2018 with the three month moving average reaching 1.23% in April 2018 but they then fell as quickly as they had climbed.  By March 2019 the three month moving average was 0.133%, yet consumer sentiment remained elevated throughout the period, and at 134.1 in May it was above every score for the 17 years prior to February 2018.

It appears the volatile nature of big-ticket purchases, given a steady or rising job market and wages may have less to do with general levels of consumption and more with the inherently cyclical nature of large item replacement.

 

 

 

 

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