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Economic Updates

Durable Goods Orders

HEADLINES
Durable goods orders fell 1.1% in September after rising 0.3% in August. This is the first decline since May and follows three months of increases. However, it still leaves this economic gauge down 0.08% year to date

WHY DO I CARE?
As a leading indicator, durable goods orders are worth keeping an eye on, especially as the economic cycle matures and more questions arise about whether a recession is lurking around the corner. The difficulty with monitoring durable goods orders is that they can be extremely volatile and need a bit of careful analysis.

WAS THERE A BIG SURPRISE?
The overall volatility of durable goods orders means that there is rarely a big surprise, even when the number is off from estimates by 0.4% as it is this month. Swings in aircraft orders can make a big month-to-month difference in orders, and August’s report was well ahead of expectations in part due to a large jump in spending on defense aircraft. Taken together, the numbers are in line with expectations.

DE TAILS
The overall decline amounts to about $2.9 billion. Approximately one-third of this comes from motor vehicles, which have now fallen for two months in a row by 1.6%. This is also a number worth watching because it is closer to consumer spending than many of the other major categories. The data reflects the number of orders, not the number of units produced, so it is unlikely that it was affected by the recent UAW strike.
Another third of the decline was caused by nondefense aircraft. This number has been down two months in a row after a huge leap in July, and it is notoriously difficult to predict. The remaining third comes from several areas, though fabricated metals showed a decline of $0.5 billion.
An interesting note of this report is that nondefense capital goods excluding aircraft was flat in July and then down in August and September. This measurement may sound arcane, but it most closely reflects the purchases of manufacturing businesses and consumers. Prolonged weakness here would be a bad sign for the economy.

Erik Olsen is Co-Founder and Managing Partner of CataMetrics Management, LLC. Catametrics provides portfolio-construction methodologies, strategic marketing and investment-management expertise to investment advisers and their clients.
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