What Are Durable Goods Orders?
Durable goods orders represent the total dollar value of new orders received by manufacturers for durable goods, which are products designed to last for three years or more. This economic indicator provides crucial insights into the health of the manufacturing sector and overall economic activity. Collected and published monthly by the U.S. Census Bureau, durable goods orders are a key component within the broader category of economic indicators that analysts and policymakers closely monitor. These goods often represent significant investment by businesses and consumers, reflecting their willingness and ability to commit to larger purchases.
History and Origin
The collection of data on durable goods orders is part of the broader Manufacturers' Shipments, Inventories, and Orders (M3) survey conducted by the U.S. Census Bureau. This survey, which began in 1957, provides comprehensive monthly statistical data on the economic conditions within the domestic manufacturing sector, aiming to measure current industrial activity and offer insights into future production commitments. The U.S. Census Bureau releases this data as part of its "Advance Report on Durable Goods Manufacturers' Shipments, Inventories, and Orders"6, 7.
Historically, shifts in durable goods orders have often correlated with significant economic events. For example, during the Great Recession, durable goods orders experienced a sharp decline, falling by 38% between December 2007 and March 2009. This downturn was largely attributed to businesses reducing their investments in new equipment and technology amidst decreased consumer demand.
Key Takeaways
- Durable goods orders measure new orders for long-lasting manufactured products, typically those expected to last three years or more.
- The data is compiled and released monthly by the U.S. Census Bureau, serving as a significant economic indicator.
- Changes in durable goods orders can signal shifts in consumer confidence and business investment.
- Due to the volatility of large ticket items like aircraft and defense equipment, analysts often review "core" durable goods orders, which exclude transportation and defense components.
- The report provides insights into the future activity of the manufacturing sector, impacting expectations for economic growth.
Interpreting the Durable Goods Orders
Interpreting durable goods orders involves understanding their implications for future economic activity. An increase in new durable goods orders suggests that businesses anticipate stronger demand, leading to increased production and potentially higher capital expenditure. This trend is generally viewed as a positive sign for the economy, indicating growing business and consumer confidence. Conversely, a sustained decline in durable goods orders can signal weakening demand and a potential slowdown in economic expansion.
It is important to consider the various components of the durable goods orders report. Orders for transportation equipment, particularly non-defense aircraft, can be highly volatile and significantly skew monthly aggregate figures5. A single large order or cancellation can cause substantial swings in the headline number. For this reason, economists often focus on "durable goods orders excluding transportation" or "non-defense capital goods orders excluding aircraft," which are considered a more stable gauge of underlying business spending plans and future industrial activity. Analyzing these subcomponents helps to smooth out the data and provide a clearer picture of trends in the broader economy and the business cycles.
Hypothetical Example
Consider a hypothetical scenario in which the U.S. Census Bureau reports a month-over-month increase in durable goods orders of 5%, significantly exceeding analysts' expectations. A closer look reveals that this surge was primarily driven by a substantial increase in orders for industrial machinery and computers. This data suggests that manufacturers are receiving more contracts for equipment crucial to production.
In response to this, a large manufacturing company that supplies components for industrial machinery might interpret this as a signal for future increased demand for its products. This could lead the company to accelerate its production schedule, potentially hiring more workers or investing in new equipment to expand capacity. Such actions, repeated across the industry, contribute to overall economic growth and reflect positive sentiment within the manufacturing sector.
Practical Applications
Durable goods orders serve as a vital input for various stakeholders in the economy and financial markets:
- Investors: Investors utilize durable goods orders to assess the health of the manufacturing sector and anticipate future corporate earnings, particularly in industries tied to heavy machinery, technology, and transportation. A strong report can lead to increased investor confidence and positive movements in relevant stock prices.
- Economists and Analysts: These professionals analyze the data to forecast Gross Domestic Product (GDP) growth, identify potential turning points in the business cycles, and gain deeper insights into the demand side of the economy. They often pay close attention to the "core" figures (excluding volatile components) for a more stable assessment4.
- Policymakers: Central banks, such as the Federal Reserve, closely monitor durable goods orders when formulating monetary policy. Strong orders may suggest rising demand and potential inflationary pressures, influencing decisions on interest rates. Conversely, weak orders could indicate a need for stimulative measures to boost economic activity2, 3. Governments also consider these figures in shaping fiscal policy and economic stimulus programs.
Limitations and Criticisms
While durable goods orders are a valuable economic indicator, they come with certain limitations and are subject to criticism. One major challenge is their inherent volatility. As reported in March 1999, a sharp decline in February orders was largely explained by a "huge swing in civilian aircraft orders," which can significantly distort the overall trend due to the large value and infrequent nature of such orders1. This volatility often necessitates looking at several months of data or focusing on less volatile sub-components like non-defense capital goods excluding aircraft to discern true trends.
Furthermore, the data can be subject to significant revisions after initial release as more complete information becomes available. These revisions can sometimes alter the initial perception of economic trends, making it difficult for analysts to react definitively to preliminary figures. The nature of durable goods, being expensive and long-lasting, means that their purchase can be easily delayed by businesses and consumers during periods of economic uncertainty, which might exaggerate the perceived economic slowdown. Issues within the supply chain or unexpected events can also impact ordering patterns, not always reflecting underlying demand or long-term economic health. Rapid changes in inflation can also complicate the interpretation of the nominal dollar values reported.
Durable Goods Orders vs. Non-Durable Goods Orders
The primary distinction between durable goods orders and non-durable goods orders lies in the expected lifespan of the products.
| Feature | Durable Goods Orders | Non-Durable Goods Orders |
|---|---|---|
| Product Lifespan | Expected to last three years or more (e.g., machinery, vehicles) | Expected to last less than three years (e.g., food, clothing, fuel) |
| Purchase Frequency | Infrequent, often large, and significant investments | Frequent, regular, and often smaller purchases |
| Economic Indicator | More indicative of business investment and long-term confidence | More indicative of immediate consumer spending and consumption |
| Volatility | Higher volatility due to large, infrequent orders | Generally less volatile, reflecting steady consumer demand |
While durable goods orders tend to reflect long-term investment and consumer confidence, non-durable goods orders provide insights into day-to-day consumption patterns. Both are important components of the overall manufacturing and retail landscape, offering different perspectives on economic activity. The U.S. Census Bureau also tracks new orders for non-durable goods, though the durable goods component often receives more attention as a leading economic signal due to the strategic nature of these purchases by businesses and consumers.
FAQs
What does a rise in durable goods orders indicate?
A rise in durable goods orders generally indicates increasing business and consumer confidence. It suggests that companies are planning for future production and investment, and consumers are making larger, longer-term purchases, signaling potential economic growth.
Who collects and releases durable goods orders data?
The U.S. Census Bureau, a division of the U.S. Department of Commerce, collects and releases the monthly durable goods orders data through its Manufacturers' Shipments, Inventories, and Orders (M3) survey.
Why do analysts often exclude transportation from durable goods orders?
Analysts often exclude the transportation component (especially aircraft orders) because these orders are typically very large and infrequent, causing significant month-to-month volatility in the overall durable goods orders figure. Excluding them provides a clearer, more stable picture of underlying business investment trends and the health of the manufacturing sector.
How do durable goods orders impact financial markets?
Durable goods orders can impact financial markets by influencing expectations about future corporate earnings, particularly in industrial and technology sectors. Stronger-than-expected data can lead to positive market sentiment, while weaker data may signal an economic slowdown.
Are durable goods orders a leading or lagging indicator?
Durable goods orders are generally considered a leading economic indicator. Changes in new orders often precede changes in overall economic activity, providing an early signal of potential shifts in production, employment, and investment.