Durable Goods Orders For December Smash Expectations, But Core Goods Plunge

by: Doug Short

The January Advance Report on December Durable Goods was released this morning by the Census Bureau. Here is the Bureau's summary on new orders:

New orders for manufactured durable goods in December increased $10.0 billion or 4.6 percent to $230.7 billion, the U.S. Census Bureau announced today. This increase, up seven of the last eight months, followed a 0.7 percent November increase. Excluding transportation, new orders increased 1.3 percent. Excluding defense, new orders increased 1.2 percent.

Transportation equipment, up following two consecutive monthly decreases, had the largest increase, $8.1 billion or 11.9 percent to $75.9 billion. (download full PDF)

The latest new orders number at 4.6 percent was dramatically above the Briefing.com consensus of 1.6 percent. Year-over-year new orders are up 5.3 percent. However, If we exclude both transportation and defense, "core" durable goods orders declined 3.9 percent. Year-over-year core goods are down a depressing 9.8 percent.

The first chart is an overlay of durable goods new orders and the S&P 500. We see an obvious correlation between the two, especially over the past decade, with the market, not surprisingly, as the more volatile of the two.

An overlay with unemployment (inverted) also shows some correlation. We saw unemployment begin to deteriorate prior to the peak in durable goods orders that closely coincided with the onset of the Great Recession, but the unemployment recovery tended to lag the advance durable goods orders.

Here is an overlay with GDP -- another comparison I like to watch closely.

The next chart shows the percent change in orders with and without transportation since the turn of the century.

Now let's exclude defense orders.

And finally, let's look at core durable goods orders, excluding both Transportation and Defense.

In theory, the durable goods orders series should be one of the more important indicators of the economy's health. But its susceptibility to major revisions of the previous monthly data suggests caution in taking the data for any particular month too seriously.

It's also worth noting that Durable Goods is a rather small component of GDP. How small? This closing chart shows the shrinkage over the past two decades.

I suppose the favorable interpretation is that durable goods just keep getting more durable and capable and thus are less frequently replaced or upgraded.