Why we’re interested in durables
Durable goods are, in the technical definition, those things which are bought to be used for more than a couple of years. The idea is akin to what is an investment in a business – if it gets depreciated over more than 12 months instead of being written off at purchase.
There is that obvious difference there, couple of years not one. But durables apply also to what we as individuals buy for use for a couple of years, not just what business is buying like “investment” is. So, we buy a car and expect to use it for more than 2 years – it’s a durable.
So, if we measure what durables are being bought we get an idea of what is happening in the economy. Clearly, because people buying durables is something happening in the economy. There’s at least some relationship between that spent on durables and the size of the economy as a whole an so we can look at it purely as that, a measure of the size of the economy.
Given that the US only produces GDP figures once a quarter this gives us a useful, if fuzzy, guide to the economy.
However, there’s more to it than that. For we all buy things we’re going to use this week – toilet paper say – whatever our views of the state of the economy. Leave aside the jokes about hoarding and spending upon consumables doesn’t vary all that much dependent upon our views of the future. Spending upon durables does.
Whether or not a vacuum cleaner is a durable doesn’t really matter, but we might well delay the purchase of a new one – struggle on with the old – if we’re worried about our job a month hence. Or not getting the pay rise, or even more minor money worries. Certainly that decision is more up for grabs than refilling the bathroom shelf with necessaries.
We can go further too
If we look deeper into durables we can see “core capital goods”. These are things that are indeed normally bought by businesses and they’re bought by them in order to make other things. So, one way to think of this number is the spending on gearing up to produce in the future.
This is a very good indicator of how business is feeling about that future. The more that is being spent here then the more business thinks the future is going to shine. And this part of the economy is self-fulfilling as well. If all businesses think the future will shine and they spend then the future will shine – because the spending by business causes it to do so.
The numbers themselves
It’s Census which gives us the durables figures:
(Durables from Census Bureau)
As we can see much of the lockdown fall has been made up already, we’re back to the normal sort of monthly variations.
So, at first pass we might say that the recovery is losing speed. But then we expected that anyway – no one at all thought the economy was going to continue to grow at the rate of the past few months, that just isn’t possible.
As Moody’s point out though:
U.S. durable goods orders disappointed in August, rising only 0.4%, which was weaker than either we or the consensus expected.
However, as when we look at inflation we look at the core rate (minus energy and food) to get an idea of trends here with durables we like to look minus transportation because that’s a highly variable component:
Excluding transportation, new orders increased 0.4 percent. Excluding defense, new orders increased 0.7 percent.
So, looking at the trend rather than the known to be variable transport and defense – we’re doing better than the headline number.
Core Capital goods
An then there’s the core capital goods, that one that tells us something about how business feels about the future:
Orders and shipments of core capital goods were up 1.8% and 1.5%, respectively.
That’s better, even if still not something to really write home about – well, not telegram, certainly.
Our other economic numbers are showing much the same these days. The recovery continues but nowhere near at the rate of the past few months, Which is sensible enough, the bounce back wasn’t ever going to be entire. We have a changed world out there as well as the recovery from a recession. Dealing with the changes will take longer than just the recovery.
The investor view
We’re still on track for further substantial recovery in the quarterly GDP figures which will run to the end of this month. The achievements of the past couple of months, even if not the exactly current numbers, ensure that.
As an estimate I think the “recovery” stage will get us back to within a few percentage points, around 5 perhaps, of where we were before all of this. The last bit will take a little longer as this requires those changes rather than just going back to what we did before.
Markets seem about correctly priced for this. So, again, we’re not getting a clear signal from macroeconomic numbers to go do something. All we’ve got is another confirmation that market prices don’t seem wrong. This leaves us looking to microeconomics, those special situations and specific companies for our investment choices. There’s no big and one way bet on the markets as a whole currently.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.