The 'Real' Goods On The Latest Durable Goods Data

by: Doug Short

Yesterday I posted an update on the July Advance Report on June Durable Goods Orders. This Census Bureau series dates from 1992 and is not adjusted for either population growth or inflation.

Let's now review the same data with two adjustments. In the charts below the red line shows the goods orders divided by the Census Bureau's monthly population data, giving us durable goods orders per capita. The blue line goes a step further and adjusts for inflation based on the Producer Price Index, chained in today's dollar value. This gives us the "real" durable goods orders per capita. The snapshots below offer an alternate historical context in which to evaluate the standard reports on the nominal monthly data.

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Economists frequently study this indicator excluding Transportation or Defense or both. Just how big are these two subcomponents? Here is a stacked area chart to illustrate the relative sizes over time based on the nominal data.

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Here is the first chart, repeated this time ex Transportation, the series usually referred to as "core" durable goods.

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Now we'll leave Transportation in the series and exclude Defense orders.

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And now we'll exclude both Transportation and Defense for a better look at a more concentrated "core" durable goods orders.

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Here is the chart that I believe gives the most accurate view of what Consumer Durable Goods Orders is telling us about the long-term economic trend. The three-month moving average of the real (inflation-adjusted) core series (ex transportation and defense) per capita helps us filter out the noise of volatility to see the big picture.

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The Trend in Capital Goods

Finally, let's take a big step back in the sales chain and look at the most popular durable goods data series according to the FRED statistics. It is Nondefense Capital Goods Excluding Aircraft (capital goods being goods that are used in the production of goods or services), shown here on a per-capita basis, nominal and real.

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As these charts illustrate, when we study durable goods orders in the larger context of population growth and also adjust for inflation, the data becomes a coincident macro-indicator of a major shift in demand within the U.S. economy. It correlates with a decline in real household incomes, as illustrated in my analysis of the most recent Census Bureau household income data:

The secular trend in durable goods orders also helps us understand the long-term trend in GDP that I've illustrated elsewhere. See especially the most recent update on GDP.

The Problem of Data Revision

Alan Hartley of Black Cypress Capital Management offers a sound warning: Beware Revisions. He looks at a snapshot of core capital goods from last year and makes the following observation:

When non-defense capital goods ex aircraft (non-seasonally-adjusted) was originally reported in 2012, it was $67,693. The following month it was revised to $66,452. It was then revised to $64,906. Today June 2012 was revised yet again to $68,555. Over the course of the year, June 2012 looked as though it had fallen nearly 5% from June 2011, only to be revised today to show an actual gain of 0.5%

The Long-Term Trend

As we can see from the various metrics above, revisions notwithstanding, the real per-capita demand for durable goods had increased substantially since the trough at the end of the last recession. But orders remain far below their respective peaks near the turn of the century and earlier. A key driver, or lack thereof, for healthy growth in durable goods orders is growth in household incomes. For a perspective on this point, see my latest update on Median Household Incomes, data through last month, which are down substantially since the end of the Great Recession.

The next durable goods update from the Census Bureau will be released on August 26th.