Three years ago we presented the difference between the PPI of durable and nondurable goods and stated that one could predict its evolution at a several year horizon. This difference is characterized by the presence of sustainable mid-term trends. Obviously, the future of both indices is of crucial importance for industries behind relevant goods, for the stock market, and for real economy. Our analysis provides a long-term prediction. Its reliability depends on the growth in real GDP in the near future.
The evolution of the producer price index of durable and nondurable goods is reported by the BLS at a monthly rate. In 2009, we presented Figure 1 which demonstrates that the difference has two distinct quasi-linear branches: between 1988 and 2000 (June), and from 2001 to 2008 (January). Red and blue lines highlight segments between 1988 and 2000, and from 2001 to 2008, respectively. Corresponding linear regression lines in Figure 1 have slopes of +0.05 and -6.8. The former slope is a negligible one, and the latter indicates that the index for nondurables has been growing since 2001 by 6.8 units per year faster than that of durables. In January 2008, the difference reached the level of -40, descending along the trend. Then the difference dropped to -67 in June and recovered to -20 by the end of 2008. This effect has been observed for all other commodities and is related to the financial crisis and recession.
Our naïve assumption about the next move after 2009 was that the difference would develop a new positive trend which would repeat the trend observed between 2001 and 2008, but with an opposite sign. The green line in Figure 1 predicts the expected evolution of the difference after 2009. Because the green line has a positive slope, the index for durables will be catching up that for nondurables since 2009. According to our assumption, the rate of approaching to the index for nondurable goods will be +6.8 units of index per year during the next 7 years. We also suggested that the actual trend might be different but almost inevitably with a positive slope.
Here, we revisit this prediction. Figure 2 displays the evolution of the difference between 2009 and 2012 which is characterized by a very high level of volatility. The local peak in 2009 was followed by a sharp drop in the difference to the level of -59 in April 2011 and a relatively slow increase since then. We have introduced a new tentative trend for the difference which is less steep than in Figure 1. We expect the difference to reach -10 by 2020. In any case the index of durables has to grow at a higher rate than the index of nondurables in the 2010s with possible (large-amplitude) fluctuations around the trend. We are going to revisit this difference in 2013.
Figure 1. Evolution of the difference between the PPI of durables and nondurables between 1985 and 2009. Red and blue lines highlight segments between 1988 and 2000, and from 2001 to 2008, respectively. Green line predicts the evolution of the difference after 2008, as a mirror reflection of the linear trend between 2001 and 2008.
Figure 2. Evolution of the difference between the PPI of durables and nondurables between 1990 and 2012. Red line highlights the segment from 2001 to 2008y. Green line predicts the evolution of the difference after 2009 which is less steep than in Figure 1.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.