Reading the Report on Durable Goods Orders

Every month the Commerce Department (in a joint project with the Census Division) releases an estimate of how many new orders US manufacturers have received for durable goods. Durable goods are all sorts of goods that are intended to last at least 3 years – things like home appliances, cars, computers, manufacturing equipment, and certain defense industry products. Trends in the new orders that manufacturers receive for such goods are assumed to be a pretty good indicator of the direction of manufacturing activity in the US over coming months.

The release also details new orders specifically for the durable goods that businesses buy, i.e. capital goods. Trends in capital goods tell us something slightly different – when firms (both manufacturing and service-sector firms) are ordering lots of capital goods, that is a good indication that they expect their business to do well in coming months and years. So the capital goods data can be taken as a possible indicator of overall future economic activity (or at least business expectations thereof), rather than just manufacturing activity.

Both of these series are of interest because they may tell us something about the future, unlike most data series which simply tell us about the past.

Today’s report showed an increase in both durable goods orders and capital goods orders in February. However, this monthly data is notoriously volatile, so what happens in one particular month tells us little. To get a better idea of what this data tells us we should look at trends over time. The following chart illustrates.

Note: I’ve removed the effects of inflation and expressed both series in year 2005 dollars, using the seasonally adjusted producer price index for durable goods.

The chart shows that US manufacturers have seen a nice uptick in their order book over the past year, finally pushing their orders back to the level of the peak of the last economic expansion. However, much of this activity has been confined to the defense industry, the consumer durables industry, and the aircraft industry. Excluding those industries we see that the orders for capital goods that all other businesses in the US are placing have only just crept up to 1998 levels.

This is an important part of the story about the US’s recovery from the last recession. Business spending has been ususually weak for an economic recovery. Instead, the recovery has been led by consumer spending and government spending, primarily on defense.

Now if only we could figure out why most US firms have seemed so reluctant to invest in new capital equipment over the past 5 years. I’d also like to know how this squares with the substantial and steady growth in industrial capacity that we’ve seen over the same period…

Kash