Durable Goods Orders For January Plunge, But Core Goods Bounce Back

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 $11.8 billion or 5.2 percent to $217.0 billion, the U.S. Census Bureau announced today. This decrease, down following four consecutive monthly increases, followed a 3.7 percent December increase. Excluding transportation, new orders increased 1.9 percent. Excluding defense, new orders decreased 0.4 percent.

Transportation equipment, down three of the last four months, drove the decrease, $14.7 billion or 19.8 percent to $59.7 billion. This was led by defense aircraft and parts, which decreased $5.1 billion. Download full PDF

The latest new orders number at -5.2 percent was well below the Briefing.com consensus of -3.5 percent. Year-over-year new orders are down 3.0 percent.

However, if we exclude both transportation and defense, "core" durable goods were up an astonishing 10.2 percent. Year-over-year core goods are up 4.5 percent. This is a dramatic reversal of -4.0% MoM and -9.9% YoY as of last December's revised data.

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.

(Click charts to enlarge)

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 chart shows the shrinkage over the past two decades.

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