Durable goods new orders January 2017
- IntroductionDurable goods are basically capital goods. Goods like machinery, trains, trucks, and any other capital good that you can expect to use for decades in order to perform your activity. It’s a very important confirmation indicators. Durable goods tend to be expensive and it takes years to make up for the investment. So one can expect that firms will only buy these if they believe the economy is going to be in a good state and they have access to good finance.
Also, durable goods are manufactured by someone, so an increase in durable goods it normally a very positive sign for the manufacturing part of the economy. Not only for the signal it generates (we expect the economy to do fine) but also because of the pure effect that it has in the results of some manufacturing companies.
It’s also interesting to mention that durable goods can be broken into different sectors of the economy. There are 4 key sections of the durable goods:
-Durable goods new orders: This is the raw aggregate indicators. It gives us a “first glance” of the economy but it has very heavy biases.
-Durable goods excluding transport: Transport tends to be VERY volatile, so it generates lots of noise in the indicator. That’s why it’s important to check what’s going on once we take this sector out of the indicator.
-Durable goods excluding defense: Defense can also have a very big effect. If Donald Trump decides to renew the US fleet, durable goods will skyrocket like crazy, but that doesn’t mean the private economy is doing better. That’s why it’s also important to exclude defense, to see if the information remains the same.
-Durable goods new orders, sectors: There is the indicator for different sectors: Manufacturing, Primary metals, Fabricated, Machinery, etc. This is also important so we can see what is going on inside the value chain of the industrial sector.
- Durable goods excluding transport
The slow down in the last 2 years in the stock market was not just the “fears of populism or politics”. If we ask the durable goods orders they tell another story. There was an actual slowdown in the rate of new orders.
As you can see durable goods orders excluding transport have been decreasing for over 2 years. Quite a very negative sign for the economy that had its impact in the stock market.
However, in the last months, things have been changed. Since early 2016 PMI and NMI (our leading indicators) have been signaling that the economy might start growing again. It’s been after summer 2016 when Durable Good Orders have confirmed this macro idea. Which, after Trump election, was clearly discounted by the market with a huge rally.
From now on, and as long as both are leading indicators keep indicating expansion, and durable goods keep confirming it, we should be biased towards a bullish position.
- Industrial value chain
The first graph shows primary metals. During 2014-2015 commodities have suffered a lot. However, as durable goods show quite well this part of the economy is now holding. This part of the economy is not yet growing, but it’s definitely holding, which is a very important change.
The next graph we are going to change will take us up the value chain. We are going to check Fabricated Metals. Which as we can see in the graph below show a very positive pattern.
Finally, I want to take a look at the machinery industry. Which in my opinion it’s very important. Primary and fabricated metals are used to build products that in most cases will give you a short term gain, for example, if you build a car in X months you’ve made the profit. But machinery is something you buy in order to produce more goods because you get your money back slowly during the next years. So in my opinion, if machinery sector strengthens it means that there is real faith in the future of the economy.
As you can see in the graph below the last half a year or so machinery has shown a very strong pattern. Not only it stopped decreasing but it has actually troughed and started increasing.
Durable goods show a very clear macro picture: growth. It shows a positive macro scenario that confirms the ideas developed by NMI and PMI.It’s true that we might be getting to the top of the business cycle, but for now, we have to expect positive results in the moths to come.
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