Durable Goods Orders. What does a trader need to know?

Durable Goods Orders. What does a trader need to know?

Durable Goods Orders is a large monthly survey that measures current and future industrial activity. Durable goods orders reflect new orders placed with domestic manufacturers for durable goods in the near term or the future. Durable goods are expensive goods that last for three years or more. Examples include machinery and equipment such as computer equipment, industrial equipment, steel, and more expensive items such as airplanes. The report contains information on shipments as well as outstanding orders and inventories. This data is usually revised in the Factory Orders report, which comes out about a week later.

Durable Goods Orders are a leading indicator of industrial production and capital spending because they show how busy factories will be in the coming months and how manufacturers are doing on those orders. This data not only indicates demand for items such as appliances and automobiles but also for business investments such as industrial equipment, electrical machinery, and computers.

How to interpret this economic indicator? If companies commit to spending more on equipment and other capital, they are obviously experiencing sustained business growth. Increased spending on investment goods sets the stage for more productive capacity in the country and reduces the prospects for inflation. On the other hand, if Durable Goods Orders are falling, there are certain economic problems. It could be a trade war, a break in the supply chain, as it was during Covid (by the way, the global supply chain has not yet been fully restored), the imposition of new taxes, or a recession.

Durable Goods Orders are measured in nominal dollars and published by the US Census Bureau. There are two reports - the regular report and the core report. The core report excludes orders for transport items.

How to read the Durable Goods Orders data? For the medium term, it's important to watch the order trends from month to month. For short-term analysis, you must compare the projected and actual values.

If Durable Goods Orders are increasing from month to month or from quarter to quarter, it indicates that manufacturers will increase activity by working to fill orders. That's good for companies and the economy as a whole. There is a correlation between rising durable goods orders and rising stock indices.

If Durable Goods Orders are decreasing from month to month, it means that companies reduce production activity for some reason. It could be an inflation increase, supply chain problems, higher taxes, a trade war, etc. But there is one thing in common: lower orders are negative because companies are losing profits, which will affect the company's stocks and stock indices.

If we are talking about a short-term reaction to the report, the actual data better than the forecast is a positive for the stock market. And vice versa, if the actual value is worse than the forecast - it can lead to a sell-off in the stock market.

Let's look at a concrete example. Last week (Wednesday, July 27), the latest Durable Goods Orders report was released. The regular report showed a 1.9% gain in orders (forecast was 0.8%), while the core report showed a 0.3% gain (forecast was 0.5%). And even if the Core Durable Index did not meet the expectations, the stock indices reacted positively to the report as the order's growth gave the investors some confidence that the economy was not in a recession yet. This is one example of how this index can be analyzed.

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by JustMarkets, 2022.08.20

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