The 'Real' Goods On The Latest Durable Goods Data

by: Doug Short

Earlier Monday, I posted an update on the December Advance Report on November Durable Goods Orders. This Census Bureau series dates from 1992 and is not adjusted for either population growth or inflation.

Let's now review the same data with two adjustments. In the charts below, the red line shows the goods orders divided by the Census Bureau's monthly population data, giving us durable goods orders per capita. The blue line goes a step further and adjusts for inflation based on the Producer Price Index, chained in today's dollar value. This gives us the "real" durable goods orders per capita. The snapshots below offer an alternate historical context in which to evaluate the standard reports on the nominal monthly data.

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Economists frequently study this indicator excluding Transportation or Defense or both. Just how big are these two subcomponents? Here is a stacked area chart to illustrate the relative sizes over time based on the nominal data.

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Here is the first chart, repeated this time ex Transportation.

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Now we'll exclude Defense orders.

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And now we'll exclude both Transportation and Defense for a better look at "core" durable goods orders.

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Finally, here is the chart that I believe gives the most accurate view of what Durable Goods Orders is telling us about the long-term economic trend. The three-month moving average of the real (inflation-adjusted) core series (ex transportation and defense) per capita helps us filter out the noise of volatility to see the big picture.

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As these charts illustrate, when we study core durable goods orders in the larger context of population growth and also adjust for inflation, the data becomes a coincident macro-indicator of a major shift in demand within the U.S. economy. It correlates with a decline in real household incomes, as illustrated in my analysis of the most recent Census Bureau household income data:

The secular trend in durable goods orders also helps us understand the long-term trend in GDP that I've illustrated elsewhere. See especially the most recent update on GDP.

The Long-Term Trend

As we can see from the various metrics above, the real per-capita demand for durable goods had increased substantially since the trough at the end of the last recession. But orders remain far below their respective peaks near the turn of the century and earlier. Moreover, the trend in the 3-month moving average in the last chart above had essentially been one of contraction in 2012, although we've seen improvement in the past two months. Is this the beginning of a sustained reversal? To some extent, the secular trend probably reflects the fact that durable goods just keep getting more durable and capable and thus are less frequently replaced or upgraded.

What percent of the nominal GDP dollar amount is contributed by Durable Goods? As of the most recent GDP report, it's a mere 1.36 percent.

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