Durable Good Orders: Why Do Investors Care

Durable goods orders reflect the new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods.

Why Do Investors Care?
Investors want to keep their finger on the pulse of the economy because it usually dictates how various types of investments will perform. Rising equity prices thrive on growing corporate profits – which in turn stem from healthy economic growth. Healthy economic growth is not necessarily a negative for the bond market, but bond investors are highly sensitive to inflationary pressures. When the economy is growing too quickly and can’t meet demand, it can pave the road for inflation. By tracking economic data such durable goods orders, investors will know what the economic backdrop is for these markets and their portfolios.

Orders for durable goods show how busy factories will be in the months to come, as manufacturers work to fill those orders. The data not only provide insight to demand for items such as refrigerators and cars, but also business investment such as industrial machinery, electrical machinery and computers. If companies commit to spending more on equipment and other capital, they are obviously experiencing sustainable growth in their business. Increased expenditures on investment goods set the stage for greater productive capacity in the country and reduces the prospects for inflation.

Durable goods orders tell investors what to expect from the manufacturing sector, a major component of the economy, and therefore a major influence on their investments.

Current Durable Good Orders Data
Orders for U.S. durable goods unexpectedly fell in February, led by a slump in demand for machinery, as the housing downturn and the prospect of a recession made companies hesitant to invest.

The 1.7% drop in demand for products made to last at least three years followed a 4.7% decrease in the prior month. Businesses are cutting equipment purchases as the biggest housing decline in a quarter century hurts sales, and rising fuel costs erode profit. Only exports are preventing manufacturing from declining even more. Economists at Morgan Stanley now predict the economy will shrink at an annual rate of 0.7% in the first quarter, from a previous forecast for a 0.4% contraction. This lead the Dow Jones Industrial Average to decline by 0.9% to 12,422.9.

Economists projected orders would rise 0.7%, after a previously reported 5.3% slump in January. Excluding orders for transportation equipment, which tend to be volatile, bookings fell 2.6%, the most since January 2007.

The slump in orders was paced by a 13% decline in demand for machinery that was the biggest since comparable records began in 1992. Bookings for non-defense capital goods excluding aircraft, a proxy for future business investment, decreased 2.6%, the most since October. Shipments of those items, used in calculating gross domestic product, dropped 2.1%, the most since January 2007. Orders excluding defense equipment decreased 1.6 percent and bookings for military gear dropped 10 percent.

February Details
  • Orders for core capital equipment — that is, nondefense, nonaircraft capital equipment — fell 2.6%. Shipments fell 2.1%.
  • Orders for transportation goods rose 0.6%, as defense aircraft rose 4.3% but motor vehicles fell 2.7%. Shipments of transportation goods fell 4.1%.
  • Orders for electronics rose 2.3%. Shipments fell a record 10.3%.
  • Orders for machinery dropped a record 13.3%. Shipments rose 3.1%.
  • Orders for electrical equipment rose 1.6%. Shipments fell 1.4%.
  • Orders for primary metals increased 1%, while shipments rose 0.4%.
  • Orders for fabricated metals fell 1.7%. Shipments dropped 1.3%

Conclusion: All this bad data point to recession and lower stock prices !!!

Source: Bloomberg, MarketWatch