Durable Goods Report: January Wasn't As Bad As Expected

by: Doug Short

The February Advance Report on January 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 January decreased $2.2 billion or 1.0 percent to $225.0 billion, the U.S. Census Bureau announced today. This decrease, down three of the last four months, followed a 5.3 percent December decrease. Excluding transportation, new orders increased 1.1 percent. Excluding defense, new orders decreased 1.8 percent.
Transportation equipment, also down three of the last four months, drove the decrease, $4.0 billion or 5.6 percent to $67.3 billion. This was led by non-defense aircraft and parts, which decreased $3.4 billion. Download full PDF

The latest new orders number came in at -1.0% percent month-over-month, which was a bit better than the Investing.com forecast of -1.5 percent. Year-over-year new orders were up 4.6 percent.

If we exclude transportation, "core" durable goods came in at 1.1 percent MoM and 1.2 percent YoY. Investing.com had a forecast of -0.3 percent.

If we exclude both transportation and defense, durable goods were flat MoM and up only 0.8 percent YoY.

The Core Capital Goods New Orders number (captial goods used in the production of goods or services) was up 1.7 percent MoM, but the YoY number was a fractional decline of 0.8 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. Over the past year, the market has certainly pulled away from the durable goods reality, something we also saw in the late 1990s.

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.

The next chart shows the percent change in Core Durable Goods (which excludes transportation) overlaid on the headline number.

Here is a similar overlay, this time excluding Defense as well as Transportation (an even more "core" number).

This last chart is an overlay of Core Capital Goods on the larger series. This takes a step back in the durable goods process to show Manufacturers' New Orders for Non-defense Capital Goods Excluding Aircraft.

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