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Dissecting Durable Good Orders
The monthly durable good orders represent factory products ready to be produced for immediate or future delivery and it give us an indication of the state of the manufacturing sector. These factory products have a life expectancy of at least three years and it is tied to capital spending representing employment growth, industrial output, productivity, and profits. The durable goods report is one of the leading indicators of industrial production and capital spending foreshadowing significant changes for the future of the economy.
It is also one of the most volatile indicators as monthly fluctuations skew the underlying trend. The report is broken down into industries so the numbers will not be skewed by large orders such as aircraft and defense orders. The advance durable good report is divided into four main components: new orders, shipments, unfilled orders, and total inventories.
New orders reflect the demand from both domestic consumers and foreign buyers through a legally binding purchasing agreement for immediate and future delivery. However a single large order between transportation and defense orders may skew the perception of theUS economy. These transportation and defense orders are separated from new orders to provide a clear sense of the economic demand.
Shipments are products that have been ordered and are now being delivered. When shipments increase it means stockpiling has slowed down.
Unfilled orders are orders that have been received but not delivered.
Total inventories are when orders exceeded with leftover supply.
Climbing Durable Good Orders
A rising durable good report suggests factories and assembly lines will remain active to satisfy the demand from consumers. The equity markets react positively to increases in new orders for durable goods as corporate profits would likely pickup. Oil prices tend to rise as well as demand for commodities used for manufacturing and construction of durable goods. A strengthening manufacturing sector would lead to faster GDP group however there maybe a possibility of higher inflation in the future.
Declining Durable Good Orders
A drop in US durable goods means goods lasting for at least three years have fallen due to lower demand for business equipment including computers and other machinery. This will lead to a slowing momentum of capital spending. Manufacturing is running out of steam – without a strong manufacturing sector it is harder to forecast stronger growth in the future.
Stock futures may head lower if there is a surprise drop in durable good orders since the likelihood of a pickup in corporate profits would be less. Shares of industrial companies may decline as well as oil prices due to lower future demand. However commodities for manufacturing and construction like steel and copper slide while the US dollar falls against major currencies Treasuries and commodities such as gold and silver climb as investors rush to safety.
Trading Strategies
Industrial sectors which would be good to consider for trading are available within the durable goods report itself. These sectors include aircraft manufacturing including aerospace and defense, transportation sector for motor vehicles and auto parts, semiconductors and computer hardware, machinery, and various metals used in manufacturing as well as other goods with a life expectancy of three years.
Higher durable good orders would mean increased manufacturing activity leading to increasing demand for supplies and raw materials such as metals. The stock market may rise anticipating higher corporate profits however if the economy is operating at full capacity then inflation fears will arise.
One of the disadvantages to durable good orders is that it may not incorporate all industry data into the government statistics. A comprehensive report will be available two weeks later within the factory orders report. Jobless claims must also be considered as an increase of claims would mean less demand for factory workers and lower demand for durable goods in the future.
REFERENCES
Bureau of the Census www.census.gov
US Department of Commerce http://www.commerce.gov/
About the Author
Shamim Hin is a Finance and Human Resources professional providing his expertise across the information publishing environments, equity markets, and the financial services industry. Shamim has worked with multinational insurance corporations including New York Life, Metlife, and Mass Mutual before engaging the equity markets as a trader on the New York Stock Exchange. His expertise allowed him to perform as an editor at TraderMongers as well as concentrating on human resources development. Shamim has a Masters in Business Administration from Fairleigh Dickinson University and holds a degree in Psychology from Rutgers University and occasionally writes on CNN iReport.
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