Understanding Durable Goods Orders: Key Insights for Investors

What Are Durable Goods Orders?

Durable goods orders are a broad-based monthly survey conducted by the U.S. Census Bureau to measure current industrial activity. They're used as an economic indicator by investors. They impact sectors including manufacturing, transportation, and technology.

Durable goods orders are significant in forecasting economic growth and stock performance. They dropped considerably during the Great Recession as businesses cut back on investment in new equipment and technologies in response to lower demand from cash-strapped consumers.

How Durable Goods Orders Impact the Economy

Durable goods orders reflect new orders placed with domestic manufacturers for delivery of long-lasting manufactured goods (durable goods) in the near term or future. The change in the total value of new orders is measured and shared with the public in two releases per month: the advance report on durable goods and the manufacturers' shipments, inventories, and orders.

Durable goods are expensive items that last three years or more. As a result, companies purchase them infrequently. Examples include machinery and equipment, such as computer equipment, industrial machinery, and raw steel, as well as more expensive items, such as steam shovels, tanks, and airplanes—commercial planes make up a significant component of durable goods for the U.S. economy. 

If a large order for some of these items comes through one month, it can skew the month-to-month results. For that reason, many analysts will look at durable goods orders, excluding the defense and transportation sectors.

Leveraging Durable Goods Orders for Economic Insight

Durable goods orders are a key economic indicator for investors and others monitoring the health of economies. Because investment prices react to economic growth, it is important for investors to be able to recognize these trends. Orders for durable goods, for example, can provide information on how busy factories may be in the future and whether they'll likely need to employ more or less staff to get through current workloads.

Businesses and consumers generally buy durable goods when they are confident the economy is improving, so an increase in these orders signifies an economy trending upwards. It can also be an indicator of future increases in stock prices. 

Durable goods orders tell investors what to expect from the manufacturing sector, a major component of the economy, and provide more insight into the supply chain than most indicators. This can be especially useful in helping investors understand the earnings in industries such as machinery, technology manufacturing, and transportation.

It's worth bearing in mind that the manufacturing lead time on capital goods takes longer on average, so new orders are often used by investors to gauge the long-term potential for sales and earnings by the companies who make them.

Key Factors Influencing Durable Goods Orders

Given the global scale of manufacturing, trade wars between countries can also lead to businesses and consumers retrenching their spending on new equipment and appliances.

For example, several American manufacturers source raw materials from China or assemble their products there. The imposition of tariffs or even the threat of such a measure can have a psychological effect on businesses and lead to lower spending.

Real-World Example of Durable Goods Orders Impact

Propelled by tax cuts and a loose monetary policy, the numbers of durable goods orders peaked in December 2007. They then subsequently fell by 38% between December 2007 and March 2009.

This sharp fall in durable goods orders was attributed to the Great Recession that engulfed the American economy. During this period, businesses cut back on investment in new equipment and technologies in response to lower demand from cash-strapped consumers.

The Bottom Line

The key role of durable goods orders is as an economic indicator that helps investors assess industrial activity and supply chain insights. They're important in predicting economic trends and they impact stock prices.

Volatile monthly data comes with some limitations, however. External factors such as trade wars can impact durable goods orders. Multi-month averages are often preferred.