Another Ugly Data Release: Durable Goods March 2012

Written by Steven Hansen

Durable goods disappointed both Econintersect and pundits this month. This is a not a noisy series, with little backward revision. Even ignoring the normal wobble in the data caused by aircraft and defense, this portion of the economy seemed unusually soft.

US Census Headlines:

  • new orders down 4.2% month-over-month
  • backlog (unfilled orders) up insignificantly month-over-month
  • the market expected new orders down 1.7% to 2.5% versus the down 4.2% actual

Econintersect Analysis:

  • new orders down 17.8% month-over-month, and up 1.0% year-over-year
  • inflation adjusted new orders down 17.7% month-over-month, and down 2.3% year-over-year
  • production (inflation adjusted using Industrial Production – durable goods) down 1.8% month-over-month, up 6.7% 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) up 0.3% 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 decline this month was due to transports, although partially offset by a rise in defense spending.  Generally, there was a softness throughout durable goods.  Econintersect concentrates on new orders as it is the entry point for future production – and somewhat intuitive economically.

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

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 upward trend was broken to the downside with the March data.

The meager growth in durable goods unfilled orders still 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 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 (graph updated through February 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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