Durable Goods Strong in February 2012, Pundits Are Wrong

Written by Steven Hansen

Durable goods disappointed the pundits.   Econintersect reviews durable goods for economic implications – and even scratching our rears cannot figure out what would disappoint in this data.  This is a not a noisy series, with little backward revision.  The data had an unusual spike in December 2011 (due to tax expiry?) which makes the January and February data look “less good” in comparison.

US Census Headlines:

  • new orders up 2.2% month-over-month
  • backlog (unfilled orders) up 1.3% month-over-month
  • the market expected new orders up 2.5% to 2.7% versus the 2.2% actual

Econintersect Analysis:

  • new orders up 8.42% month-over-month, and up 17.7% year-over-year
  • inflation adjusted new orders up 9.7% month-over-month, and up 14.3% year-over-year
  • production (inflation adjusted using Industrial Production – durable goods) down 0.4% month-over-month, up 8.5% year-over-year [note that this is a series with moderate backward revision]
  • backlog (unfilled orders) up 1.7% month-over-month

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 growth this month was more broad and concentrated outside of defense and transportation.

Historically the month of February has appeared stronger in comparison to January.

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.

As an alternative, instead of trying to use inflation adjustments – we can view durable goods using Industrial Production – Durable Goods to see the real growth and associated trends – and the trend is now appearing as slightly up due to continuing backward revision.

Growth in durable goods unfilled orders confirms an economic expansion cycle is underway.

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 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 (graph updated through January 2012 data):

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

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