Orders for aircraft, trucks, tractors, and other durable goods can offer clues about the economy.
© Faraways, SFIO CRACHO, stefan1179/stock.adobe.com; Photo illustration Encyclopædia Britannica, Inc.
At its core, the durable goods report is a measure of economic confidence based on actual spending decisions. Durable goods are products expected to last at least three years, including vehicles, appliances, machinery, computers, and aircraft. The report tracks whether consumers and businesses are willing to commit money to purchases that can be postponed.
When times are uncertain, consumers tend to hold off on big-ticket purchases. They’ll keep driving the old car a little longer, postpone the kitchen remodel, and hope the washing machine survives another year. Businesses often do the same, delaying equipment purchases and expansion plans until the outlook becomes clearer.
Key Points
- Durable goods are products expected to last at least three years, such as vehicles, appliances, machinery, and aircraft.
- Because consumers and businesses can often postpone these purchases, durable goods orders can offer insight into economic confidence.
- Economists often look beyond the headline number to core capital goods orders, a closely watched measure of business investment.
In contrast, when consumers and businesses are feeling more confident about the economy, that’s when they start ordering the more expensive, long-term stuff. That behavior is exactly what makes the U.S. Census Bureau’s monthly durable goods report worth watching. Higher spending on durable goods is both a measure of economic sentiment and a bellwether for economic growth.
What is the durable goods report and what does it measure?
The durable goods report—officially called the Monthly Advance Report on Durable Goods Manufacturers’ Shipments Inventories and Orders—is a monthly Census Bureau publication that tracks new orders, shipments, and inventories reported by U.S. manufacturers.
The report covers of a wide range of goods, including vehicles, aircraft, major appliances, and industrial machinery. Two characteristics make durable goods especially useful as economic indicators:
- Discretionary. Many durable goods purchases aren’t immediate necessities. A household may want a new dishwasher, and a business may want new equipment, but neither purchase has to happen today.
- Deferrable. Consumers and businesses can often delay these purchases when economic conditions are uncertain and move forward when confidence improves.
Because these purchases can often be postponed, economists watch durable goods orders for clues about future economic activity.
Economic cycles and durable goods
Durable goods purchases often rise and fall with the business cycle. During expansions, consumers and businesses are more willing to commit to major purchases; during slowdowns, those same purchases are often among the first to be delayed. Learn more about economic cycles.
That’s what distinguishes durable goods from nondurable goods like food, fuel, and other everyday necessities. You can postpone buying a car or a piece of machinery. You can’t postpone your next meal or your commute to work.
A tour inside the durable goods report
For most investors, the durable goods report comes down to six key measures.
This figure tracks new orders for manufactured durable goods. It tends to be volatile from month to month due to large aircraft and defense orders.
Why it’s important: New orders provide an early read on future economic activity. Businesses typically commit to major purchases when they’re confident about demand, income, and the broader economic outlook.
2. Orders ex-transportation
This number is less volatile because it excludes aircraft and auto orders, providing a clearer picture of underlying demand.
Why it’s important: By removing some of the report’s largest and most volatile categories, orders excluding transportation can provide a smoother look at consumer and business demand.
3. Core capital goods orders
This category is a proxy for business investment because it includes equipment businesses commonly use. It excludes defense spending and aircraft orders, which can introduce large one-time swings into the data.
Why it’s important: This measure shows whether businesses are purchasing equipment such as computers, communications systems, electrical equipment, industrial machinery, and medical instruments. Because these purchases are often tied to expansion plans, it is widely viewed as an indicator of business confidence and future economic growth.
Shipments are completed orders that manufacturers have delivered. Once shipped, the products are included in gross domestic product (GDP) calculations.
Why it’s important: This figure tracks the completion of the order pipeline. In addition to contributing to GDP, shipment levels can also indicate whether business activity is generally expanding or contracting.
Inventories consist of goods that manufacturers have produced but not yet sold.
Why it’s important: Inventories gauge the balance (or imbalance) between supply and demand. Are goods being sold as quickly as they’re being produced? Is inventory building because demand is slowing? Or are inventories being depleted so quickly that manufacturers may need to ramp up production?
6. Unfilled orders (backlogs)
Unfilled orders are the backlog of customer orders awaiting delivery. A growing backlog indicates that demand may be exceeding the capacity to produce or deliver.
Why it’s important: The backlog of unfilled orders provides insight into future production activity. A growing backlog can signal healthy demand and future sales, while a shrinking backlog may suggest that new orders are no longer arriving as quickly as existing ones are being filled.
Interpreting the durable goods data
The headline number tends to grab the attention—and sometimes the headlines. But the real story is often found in the supporting data.
That’s why economists look beyond new orders and compare them with shipments, inventories, and backlogs. Viewed together, those figures can reveal whether demand is strengthening or weakening, whether production is keeping pace, and whether businesses are growing more confident or more cautious.
Economic factors affecting durable goods will vary, but there are some general assumptions or rules of thumb you can draw from when interpreting the movement of the six data points relative to one another.
If headline orders and core capital goods orders are both climbing: Together, these trends suggest that confidence is broad-based. Businesses see stronger demand for big-ticket items and are ramping up orders to keep pace. At the same time, they’re confident enough in the economic outlook to invest in their own expansion, whether through new equipment, upgraded machinery, or added production capacity. Both are healthy signs for a growing economy.
If orders and backlogs keep climbing while inventories remain low: This combination suggests that manufacturers are running close to capacity and are struggling to keep up with demand. Although not bad news in itself, it does raise the odds for supply bottlenecks, which, if not resolved, can lead to higher prices ahead.
If headline orders are falling while inventories are rising: In this scenario, demand is cooling faster than manufacturers can adjust. Businesses likely overestimated demand. There’s a buildup of unsold goods while new orders are falling—one possible sign of an economic slowdown that could lead to a recession. But the effects will likely vary across sectors and industries. Those tied to capital spending, like industrials and machinery, may experience it more immediately. Defensive sectors like utilities and consumer staples have historically held up better.
If the slowdown in demand persists: There’s a difference between a temporary slowdown in the order pipeline and a more sustained drying up of new orders and backlogs. To determine whether a slowdown is spreading through the economy, compare it with other indicators, such as industrial production, consumer sentiment, and labor market data.
The durable goods report helps reveal whether consumers and businesses are willing to commit to purchases that can often be postponed. No single number tells the whole story. Viewed alongside shipments, inventories, and backlogs, durable goods orders can provide valuable clues about business investment, consumer demand, and the economy’s overall direction.
The durable goods report is just one of many economic indicators. Combined with other reports on employment, production, and consumer sentiment, it helps build a fuller picture of where the economy may be headed.
This article was most recently revised and updated by Karl MontevirgenThis article was most recently revised and updated by Doug Ashburn
