I’ve written before about the importance of the monthly durable goods report.
It’s one of the few economic reports that is forward-looking. Formally known as the monthly report from the Census Bureau on new orders for durable goods, this data offers insights into what factories will produce in the future.
Durable goods are products designed to last at least three years. They include kitchen appliances, computers and industrial machinery used in factories.
New orders for durable goods are one of the few indicators that combines consumer and business confidence.
Consumers make big purchases when they’re optimistic about the future. That’s especially true for financed purchases. Financing shows confidence in the ability to make payments.
Pessimistic consumers delay purchases. Think of your own household: If you’re worried about losing your job, you probably avoid new debt. This idea applies to the larger economy. Millions of households behave that way.
These same factors affect business decisions as well. Businesses make big purchases when managers are optimistic and defer decisions when they are pessimistic.
Durable Goods Orders Slow Down
In June, according to The Wall Street Journal, “new orders for products meant to last at least three years increased 0.8% … Economists surveyed by The Wall Street Journal had estimated a 2% gain.”
The fact that orders were lower than expected is disappointing. New orders in the chart below tell us the economy is back in the slow-growth, normal range.
Durable Goods Orders Normalize
The indicator at the bottom of the chart is the six-month rate of change of new orders. The extremes of the pandemic, to the downside and the upside, have dissipated. The indicator is now back in its usual range.
This means slow economic growth lies ahead.
Durable goods are still bullish for the stock market. If orders are greater than they were six months ago, the S&P 500 generally moves higher. Avoiding the stock market when new orders are lower than they were six months ago beats a buy-and-hold strategy.
For now, durable goods orders are weakening, but that’s bullish for stocks.
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Michael Carr is a Chartered Market Technician for Banyan Hill Publishing and the Editor of One Trade, Peak Velocity Trader and Precision Profits. He teaches technical analysis and quantitative technical analysis at the New York Institute of Finance. Mr. Carr is also the former editor of the CMT Association newsletter, Technically Speaking.
Follow him on Twitter @MichaelCarrGuru.