Durable Goods Improves in June 2012 – The Argument is How Much

Written by Steven Hansen

Yes, durable good’s new orders are up – but nowhere near the Census bureau estimate of 1.6%.  Econintersect believes the number is 0.5%, whilst the slightly different data grouping from the Federal Reserves sees an increase of 0.7%.

The very worrying situation is the continuing decline of unfilled orders (backlog) – and the strange seasonal analysis by Census which is saying backlog improved.

Census Headlines:

  • new orders up 1.6% month-over-month
  • backlog (unfilled orders) up 0.4% month-over-month – the backward data revision now improved the history of backlog to being up 29 of the last 30 months
  • the market expected new orders up 0.3% to 1.0% versus the up 1.6% actual

Econintersect Analysis:

  • new orders up 0.5% month-over-month, and up 6.7% year-over-year
  • production (inflation adjusted using Industrial Production – durable goods) up 0.7% month-over-month, up 9.7% year-over-year [note that this is a series with moderate backward revision – and it uses production as a pulse point (not new orders or shipments)]
  • backlog (unfilled orders) down 0.2% month-over-month – the third consecutive month of decline

Durable Goods sector is the portion of the economy which provides products which have a utility over long periods of time before needing repurchase – like cars, refrigerators and planes.

The strength this month was due to aircraft (both civilian and defense).  Econintersect concentrates on new orders as it is the entry point for future production – and somewhat intuitive economically.

Unadjusted Durable Goods New Orders – Current Value

The trend lines are uncertain – but I will be kind and say they are flat as the growth has been in the same channel since mid-2011:

Year-over-Year Growth Durable Goods New Orders – Unadjusted (blue line) and Inflation Adjusted (red line)

The above graphic shows both the year-over-year change for unadjusted new orders and inflation adjusted new orders using the PPI for inflation adjustment.

This month’s graphic shows the second month of fall in unfilled orders. One or two months is not a trend, but several months of decline would be a serious economic warning sign.

Unadjusted Durable Goods Unfilled Orders – Current Value (blue line, left axis) and Year-over-Year Change (red line, right axis)

It is interesting that this data does not agree with the Federal Reserves Industrial Production (Durable Goods) subindex which shows 9.7% year-over-year growth, and +0.7% growth month-over-month.

Comparing Seasonally Adjusted Durable Goods Shipments to Industrial Production Durable Goods

One final look at the Durable Goods data in our search for a slowing economy is for inventory buildup.  Although this series is noisy, it appears inventory levels have remained relatively constant since the beginning of 2010.

Unadjusted Inventory to Sales Ratio

Caveat on the Use of Durable Goods

The data when first released is subject to several months of revision. The revisions currently have been minor – making the initial headline data reasonably accurate in real time.

The data in this series is not inflation adjusted – and Econintersect adjusts using the appropriate BLS Producer Price Index for durable goods or uses Industrial Production (IP) – durable goods sub-index which is a non-monetary index.

As in most US Census reports, Econintersect does not agree with the seasonal adjustment methodology used and provides an alternate analysis. The issue is that the exceptionally large recession and subsequent economic roller coaster has caused data distortions that become exaggerated when the seasonal adjustment methodology uses several years of data. Further, Econintersect believes there is a New Normal seasonality and using data prior to the end of the recession for seasonal analysis could provide the wrong conclusion.

Econintersect determines the month-over-month change by subtracting the current month’s year-over-year change from the previous month’s year-over-year change. This is the best of the bad options available to determine month-over-month trends – as the preferred methodology would be to use multi-year data (but the New Normal effects and the Great Recession distort historical data).

Durable goods expenditure is a major element of GDP. Therefore may pundits look for enlightenment within the durable goods data for economic direction. To illustrate how durable goods new orders and backlog fits into a recession watch, the Fred graph below (produced based on August 2011 data) shows clearly that data trends down preceding a recession. Unfortunately, there are several false indications of recessions.

More importantly, durable goods as discussed in this post is not the durable goods of the consumer – as it includes business and government consumption while excluding imports. For a better understanding of consumer demand for durable goods, the BEA’s Personal Consumption Expenditure’s Durable Goods data series should be used:

Durable goods is not a good economic forecasting tool as it contains too many false warnings of economic contraction.

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