What are Durable Goods Orders?
Durable goods orders are an economic indicator released monthly by the Bureau of Census that reflects new orders placed with domestic manufacturers for delivery of factory hard goods (durable goods) in the near term or future. Durable goods orders come in two releases per month: the advance report on durable goods and the manufacturers' shipments, inventories, and orders.
- Durable goods are key economic indicators that measure the number of new orders placed with domestic manufacturers for delivery of factory hard goods in the near term or future.
- A high durable goods number indicates an economy on the upswing while a low number indicates a downward trajectory.
- A strong durable goods order number may lead to a rally in the bond market while a weak number may lead to declines.
Understanding Durable Goods Orders
Durable goods are expensive items that last three years or more. As a result, companies purchase them infrequently. They include machinery and equipment, such as computer equipment, industrial machinery, and raw steel. They also include expensive items such as steam shovels, tanks, and airplanes. In fact, commercial planes make up a significant component of durable goods for the U.S. economy. If a large order for some of these items comes through one month, it can skew the month-to-month results. For that reason, many analysts will look at durable goods orders, excluding defense and transportation sectors.
Durable goods orders are a key economic indicator for investors and others monitoring the health of economies. Because investment prices react to economic growth, it is important for investors to be able to recognize trends in the growth of an economy. Orders for factory hard goods, for example, can provide information on how busy factories may be in the future. Orders placed in current months may provide work in factories for many months to come as they work to fill the orders.
Businesses and consumers generally place orders for durable goods when they are confident the economy is improving. An increase in durable goods orders signifies an economy trending upwards. It can also be an indicator of future increases in stock prices. Durable goods orders tell investors what to expect from the manufacturing sector, a major component of the economy.
By contrast, the manufacturing lead time on capital goods takes longer on average, so new orders are often used by investors to gauge the long-term potential for sales and earnings increases by the companies who make them.
Given the global scale of manufacturing, trade wars between the two countries can also lead to businesses and consumers retrenching their spending on new equipment and appliances. For example, several American manufacturers source raw materials from China or assemble their products there. The imposition of tariffs or even the threat of such a measure can have a psychological effect on businesses and lead to lower spending.
The Durable Goods Report
Durable goods orders are published in the Durable Goods Report. It provides more insight into the supply chain than most indicators and can be especially useful in helping investors understand the earnings in industries, such as machinery, technology manufacturing, and transportation.
A weak durable goods report will generally lead to a decline in the bond market. However, data can often be volatile and revisions of durable goods orders reports are not uncommon. Investors and analysts typically use several months of averages instead of relying too heavily on the data of a single month.
Example of Durable Goods Orders
Propelled by tax cuts and a loose monetary policy, the numbers of durable goods orders peaked in December 2007. They fell by 38% subsequently between December 2007 and March 2009. After peaking in December 2007, durable goods orders numbers fell by 38% till June 2009 due to the Great Recession that engulfed the American economy. The decline was primarily due to businesses cutting back on investment in new equipment and technologies. Consumers also pulled back in their spending, resulting in a massive decline in the number.