Wednesday, July 28, 2010

Durable Goods and Core-New Orders

So what exactly are durable goods?
They are products that have a life expectancy of at least three years (i.e. Macbook Pros, General Motors automobiles, washing machines,  hair dryers?, IPhones, Gulf Stream V's ect.)  From this we get the accurate sense that many important sectors of the economy are tied to durable goods production (i.e. employment, industrial production, profits, and productivity).  Also this report serves as a behind the scenes sneak preview to the comprehensive factory orders report, which includes both durable and nondurable goods.

This report is based on results obtained from 3,500 manufacturers representing 89 industry categories.  All the numbers are seasonally adjusted  but not annualized, and its only in nominal terms(aka the dollar amounts are not adjusted for inflation).  To estimate real changes in durable goods orders compare the growth rate over time with the performance of the producer price index.

The report can be found here.
This release is divided into 4 main sections: new orders, shipments, unfilled orders, and total inventories.

Table 1: Durable Goods Manufacturers' Shipments and New Orders

New Orders Decreased 1% or 2 billion to 190.45 billion. A persistent decline in new orders is ominous as it suggests that some factories may go unused.  But we have to keep in mind that this data can be misleading because of a single large military purchase or transportation order.  So we will also want to look at at the rows excluding defense (still a 0.7% drop in new orders) and transportation (.6% drop in new orders) and we find that the drop in new orders is less with these more volatile components removed.

Now with a little bit of common sense we can calculate new orders excluding defense and transportation.  Let's call it "Core-New Orders" which like core cpi excludes the most volatile components.

"Core-New Orders"(in millions) for June:

132,536 = 190,490 - ((190,490 - 144,571(excluding transportation)) + (190,490 - 178,455(excluding defense)))

In May they were:

132,678  = 192,455 - ((192,455 - 145,420 (excluding transportation)) + (192,455 - 179,713 (excluding defense)))

The percentage change from last month was:

(( 132536 - 132678 ) / 132678) x 100 = -.11%

Certainly this is not as dramatic of a fluctuation as the standard new orders measure.  Therefore this helps us realize that new orders hasn't fallen off the cliff and that although consumer demand is cutting back it is not as devastating as the standard number has you believe.  Something I found interesting is the two conflicting titles that WSJ put out today.  Real Time Economics highlights the positives:
Economists React: Encouraging Details in Durables

and WSJ Economy makes it clearly sound like a volatile downward turn:
Durable-Goods Orders Slide

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