Yesterday's Durable Goods News Reporting Highly Misleading

by: William Trent, CFA

Talk about a misleading headline...

Durable goods orders fell 2.4 percent in July

New orders for U.S.-made durable goods fell a much greater-than-expected 2.4 percent in July as civilian aircraft and car orders tumbled, a government report showed on Thursday.

If any report could serve to remind us why we prefer to look at the year/year change in non-seasonally adjusted data, this one was it. The seasonal adjustments, normal volatility and uncertainty as to whether these advance reports will be adjusted dramatically, combine to make the month/month headline data next to worthless.

Here’s what the durable goods trend looks like when presented as the growth from the same month last year, without any adjustments (source: Census Bureau).


Suddenly things don’t look so gloomy. Yes, shipments are cooling off a bit but growth remains healthy in the high single digits. The huge decline in new orders? Try a sudden surge in growth. Backlog also remains strong, but the gradual rise in inventories could be a concern in the near future, particularly if they begin to grow faster than shipments. Still, all in all this was hardly a bleak picture.

The headline numbers did pick up some of this trend. As the above article reports:

At the same time, non-defense capital goods orders excluding aircraft, seen as a signal of business spending, rose a much larger-than-expected 1.5 percent. Analysts had forecast a 0.4 percent rise in the category.

Let’s look at that data on an unadorned basis:


Shipments, orders and backlog showing double-digit and accelerating growth, while inventories decline. Couldn’t be any better than that.

Market participants probably won’t know whether to shout for joy over this information or weep with fears that the Federal Reserve will have to start their rate hikes up again in earnest. Indeed, perhaps the most important issue at stake here is one we can’t glean from the data given here: Are orders and shipments up because of growing units, or growing prices?