Durable Goods Continued to Show Growth in October 2011

Durable Goods data was mixed in October 2011 – but continued to show moderate year-over-year growth.  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.

US Census Headlines:

  • new orders down 0.7% month-over-month
  • backlog (unfilled orders) up 0.2% month-over-month

Econintersect Analysis:

  • new orders up 2.7% month-over-month, and up 6.9% year-over-year
  • production (inflation adjusted using Industrial Production – durable goods) up 0.1% month-over-month, up 7.8% year-over-year
  • backlog (unfilled orders) down 0.3% month-over-month

The drag this month on new orders were transports – civilian aircraft.  All other major portions of durable goods were moderately positive.

Historically October is a month with lower durable goods sales (new orders) than Septembers. It may be difficult to see this in the above graphic because the comparison with previous months is not that clear.

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 inflation adjustment methodology has the month-over-month improvement at 3.1% and year-over-year at 3.1%.

As an alternative, instead of trying to use inflation adjustments – we can view this industry using Industrial Production – Durable Goods to see the real growth and associated trends – and the trend is flat, meaning that the rate of growth is neither up or down.

However, durable goods unfilled orders declined 0.3% month-over-month.  There is no obvious reason as unfilled orders are not that seasonal.

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.

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 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.

Addendum for Discussion of Comments:

The following graph removes military and aircraft:

The following graph shows consumer demand (theoretically backing out business).  However, it appears this data set only includes 25% of consumer spending on durable goods (for sure it leaves out imports).

The following graph uses Personal Consumption Expenditures series to look at durables:

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4 replies on “Durable Goods Continued to Show Growth in October 2011”

  1. Mourning Steven.
    While you do point out that “aircraft orders” skewered (sp) the data, you did not point out the recent Boeing sales reports – that they were few if none, and then huge Dreamliner sales to the Gulf Oil States.

    There is no way that we can SEE the real numbers without backing out the Boeing numbers – past, present and future. They are on a roller coaster, as are we.

    That having been noted, we might also have to back out “pent up demand”. As with “cars”, we put off buying stuff – well, replacing stuff – until we can see what the future holds for U.S.

    To look at “vehicle sales” without factoring in “fleet sales” – both rental and corporate – was, and is, ludicrous. And, to not look at “leasing” sales, was as well.

    To look at “imports” without looking at the volume and price of crude oil, is too.

    That having been said, your post, along with Doug Shorts, are truly illuminating.

    As she once said:
    “The sex was really great…, but you can to do better.”
    When we pointed out that “The Others” didn’t complain, we reached an “impasse”.

    As a comment over at SA pointed out, we – meaning, of course, you! – may need to parse out “consumers” from businesses.

    For two reasons:
    first, consumers are far more likely to buy what they “want” to satisfy what they think they “need”, at the moment.
    whereas, a business is far more likely to buy only what they feel they need to satisfy the wants of their customers.

    second, consumers are far more likely to buy something that they will never use, and keep it, in “storage” for when they will.
    whereas a business is far more likely to sell off anything and everything that is not bringing in “cash”.

    So, as we pointed out to NAR’s Yun, not including foreclosures bcuz they were historically irrelevant, was SO then.

    And, so, what businesses think they are doing, and what consumers think they are going, and why, is very different.

    The problem is that, like in WA state community property law and divorce, you may be “commingling your assets”. Oh…, and that under WA law is very bad.

  2. JGB –

    Appreciate you enlightened comments. Durable goods is noisy – really too noisy to be used to draw any meaningful conclusions – whether aircraft are left in or out, or the military is left in or out or transport is left in or out.

    too many variable exist that determine when durable goods sales occur, and economic conditions are just one of these variables. Technology jumps and natural disasters are also major factors.

    the largest problem IMO is that this is a monetary index – and no clean methodology exists to convert it to “real” dollars – so we can compare apples-to-apples from period to period. i have used three separate methods to convert to real dollars, and i am unhappy with all three.

    the cleanest way to look at this is through the industrial production durable goods subindex AND durable goods employment which both indicate a slight upward bias trend.

    an interesting comment on commingling business and personal sales. i would be interested in seeing a breakdown.

    the census data base does not provide enough detail for this breakdown. besides the fact we know few consumers buy tanks and aircraft, both business and private citizens buy food, fuel, construction products and refrigerators.

    steven

  3. Very good and interesting points, thanks.

    We were just reminded by the NYTimes – oh, we know, to be reminded of anything by “Them” is politically inexcusable, but – they pointed out in their durable goods article this “little point”:

    “core capital goods — nonmilitary products excluding aircraft — has been surging this year, spurred by tax breaks that are allowing companies to write off their investments all in one year as long as the purchases are made before the end of 2011.”

    So, Steven, what we might really be seeing in durable goods is the same thing we saw in “first time home buyers sales”. And, after (Y)our New Year’s hang over, we might wonder what the Hell hit U.S.!

    Digression – minor, economic: what will be very interesting to see is the spending on “military goods” – both after the wars are over, OR if the automatic reductions ever take place.

    What most of U.S. do not know is that the military had “used up” massive amounts of military hardware, that they have delayed replacing, in favor of buying what is currently most needed and effective.

    What that means is that there is a huge pent up demand for the rejuvenation of our national defense system.

    If we do not do that, we risk being severely attacked and/or beaten in new wars. But, if we do it, where will the money come from?

    Maybe the Gulf Oil states will continue to “loan” U.S. the money, which we will pay for in a hidden tax on each gallon of gas we use.

    Maybe we are missing it, somewhere, but what is The “Durable” Good News in this predicament?

  4. JGB, you comments forced me to dig deeper using other data series. Please refer to the additional graphs I have added to the post (addendum)

    1) whether the military or transport is in or out – the rate of growth of durable goods is the same. in other words, these portions of durable goods are not affecting anyone’s overall analysis.

    2) durable goods in this post refer to USA manufactured durable goods. when we expand to the consumer who has the ability to buy foreign made consumer goods also – we can see the consumer is strongly consuming.

    3) I can find no nuances in the data that supports the NYT article that durable goods are being driven by expiring tax breaks. This falls in the same category as the assertions by the NAR that home sales are affected by growing cancellations.

    4) the defense budget of the USA specifically excludes the cost of the Iraq and Afghanistan wars – and is paid for as a separate line item in the USA budget. I find it illogical that the military would be robbing peter to pay paul as it is an unnecessary transaction :). It would be more logical that the military was corrupting funds from the war budget item to the defense budget.

    steven

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