The durable goods orders report is a monthly report released by the U.S. government. The report encapsulates the sales of durable goods over the preceding month. It is keenly followed by financial analysts and economists as the purchases require large amounts of funds and are directly proportional to economic strength.
Understanding the Durable Goods Orders Report
Goods that are long-term purchases and are expected to last a consumer at least three years are known as durable goods. They are usually bought by businesses and consumers when there is stability in the economy. When the economy is not doing well, investing in durable goods is usually postponed.
If the economy is doing well, there is a rise in the sale of durable goods as there is overall positivity in the economy, and consumers are able to afford them. When there is an economic recession, consumers demonstrate low confidence, and the sale of durable goods and stock values decreases. The durable goods orders report helps in two important ways:
The report helps in evaluating the durable goods industry in particular and the economy in general.
Household finance is directly affected by the economic situation. A fall in the sale of durable goods is usually an indicator of an economic downturn.
The durable goods report encapsulates the sales of durable goods over the preceding month. It is considered a reliable indicator of the manufacturing sector, and the market tends to move in the direction of the indicator.
Goods that are long term purchases and are expected to last a consumer at least three years are known as durable goods.
According to the Bureau of Economic Analysis (BEA), there are three types of durable goods: consumer durable goods, business durable goods, and nondurable goods.
Consumer durable goods: Goods bought by individuals and households. They include furniture, automobiles, electronics, luggage, books, and sports equipment.
Business durable goods: Durable goods used by businesses are plant, property and equipment (PP&E). They include industrial equipment such as machinery and electrical apparatus. They also include boats, trucks, buses, and aircraft.
Nondurable goods: Goods that are known to last less than three years on average and include goods such as food, clothing, tobacco, personal care products, etc.
The Importance of the Durable Goods Orders Indicator
The durable goods orders index measures the demand for U.S-manufactured durable goods, domestically and internationally. When the value of the index is rising, it means demand is increasing, which will directly result in increased production and employment. A falling index value results in the opposite.
The durable goods orders take into account all orders and unfilled orders of durable goods and shipments for the preceding month. It is considered a reliable indicator of the manufacturing sector, and the market tends to move in the direction of the indicator. However, its volatility and tendency to be subject to significant revisions make it a little less credible.
Such shortcomings can be overcome by looking at particular orders as the total number can be misleading due to huge increases in a particular industry. Increases solely in one sector are usually not counted as they can mislead the readers of the report, and the market is more interested in broad-based increases in orders.
Durable goods orders give a better understanding of the supply chain than most indicators. It can be very useful in helping investors understand corporate earnings in industries, such as technology manufacturing, machinery, and transportation. Investors and analysts usually use several months of data and average it rather than just using data of a single month.
As investment prices are a reflection of economic growth, investors use durable goods orders and other indicators to identify trends in the market. Orders for industrial machinery can indicate how busy industries are likely to be in the future. Orders placed in current months can lead to busy industries over the next few months. Durable goods orders give a thorough understanding of the manufacturing sector, which is a major sector of the economy.
When compared to other types of goods, the manufacturing lead time on capital goods takes longer. New orders in the durable goods orders are therefore used to understand the long-term potential for sales and earnings by the companies that have placed the orders.
After soaring in late 2007, the durable goods orders index fell by nearly 40% between 2007 and early 2010 due to the 2008 Global Financial Crisis. It was due to businesses reducing the amount spent on investment and consumers cutting on their spending.
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