• February 1, 2023

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Key Takeaways

  • U.S. durable goods orders increased 1.9% in June, driven by a huge 81% increase in military aircraft orders.
  • Core durable goods orders, which removes transportation, government and military spending, increased 0.50% over the month.
  • Much of the increase outside of military spending can be put down to increased prices as a result of sky high inflation, rather than a material jump in order numbers.

U.S. durable goods orders were through the roof in June, smashing through economists forecasts which were predicting a decline. The overall numbers were up 1.9% for the month, against a economists poll from the Wall Street Journal which had predicted a decline of 0.4%.

The Durable Goods Orders Report is a monthly survey conducted by the U.S. Census Bureau. For investors, it can provide an insight into the current level of industrial activity and is often considered an indicator of broader business investment.

It caps off a solid 12 months for the durable goods sector, which has been working hard to keep pace with a post-Covid spike in demand. The challenge has been exacerbated by a tight labor market making it difficult to source workers and a supply chain which continues to crawl rather than run.

Growth has been in positive territory for 10 out of the past 12 months, and the 1.9% uptick in June is the second highest figure during the period.

Military aircraft were the standout driver of the growth, with computers and related products and new car orders also adding to the headline figure.

What are durable goods?

The durable goods sector is made up of companies that manufacture items with an expected lifespan of over three years. The sector is generally made up of complex goods that are expensive and require many parts to manufacture.

It’s for this reason that the sector is often considered a bellwether of business growth in general, as the parts and materials that make up durable goods cross many different sectors of the economy.

Some examples of items that fall into this category include cars, planes, computers, appliances like refrigerators and TV’s, as well as industrial machinery and even tanks.

Notable companies within this category include the automakers GM, Ford and Toyota, aircraft manufacturers Lockheed Martin and Boeing, computer hardware companies HP and Dell and others like Weber, Callaway and Stanley Black & Decker.

The Durable Goods Orders report comes out on a monthly basis and looks at the new orders that have been placed in the industry. Due to the nature of some of these industries, orders can be lumpy. Aircrafts in particular are not usually purchased on a regular monthly basis by airlines and the military, and instead tend to come in large, infrequent orders that can skew the results.

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It’s for this reason that transportation and defense orders are sometimes removed by analysts to provide a figure that is often referred to as the Core Durable Goods Orders.

One of the key aspects of the durable goods orders report is that it is based on new orders that have been placed, not production that has already occured. This means it is a leading indicator of the level of manufacturing that is likely to be taking place over the coming months.

For example, if a new order is placed for a Ford truck, it will go into production at the Ford factory and won’t be completed for some time. In that way it provides an insight into the level of economic activity that can be expected in the future.

Aircraft and car orders drive growth

The report for this month showed the major factor for the positive result was an 81% increase in orders for military aircraft and parts, compared to a 2.1% fall in orders for civilian aircraft. New car’s added 1.5% to the overall figure, while computers and related products chipped in 5.9%.

Removing the volatile transportation sector to get to the core durables goods orders, there was still an increase but it was a more modest 0.5%. Orders have now increased in eight out of the last nine months.

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However, the majority of these increases can be put down to rising prices as a result of sky high inflation, rather than a material increase in the number of orders being placed. It’s yet another economic indicator that is somewhat on the fence about the possibility of a future recession.

There were also sectors which declined over the month. Primary metals orders were down 1.1%, communications equipment orders fell 2.3%, civilian aircraft orders weakened by 2.1% and defense capital goods (non-aircraft military equipment) was down 2.7%.

Given these figures, there are some concerns that the data shows an overall weakening once the impact of inflation is taken into account. Outside of government spending, particularly military spending, the data doesn’t show a particularly high demand or the expectation of a significant increase in economic activity going forward.

The durable goods challenge going forward

Over the past two years, the durable goods sector has had to deal with a very challenging environment. This isn’t a situation that has been unique to the sector, but the problems have been particularly acute due to the global microchip shortage.

Chips are vital components in almost every area of the durable goods sector these days. Cars make extensive use of technology and microchips, computers and fighter jets obviously do and even appliances like fridges often now require microchips for internet connectivity and smart features.

Labor shortages have also been a major problem. Many factories were forced to shut down during the peak of the pandemic, which caused workers to look for more stable alternatives or even decide to leave the workforce altogether.

Hiring to replace these workers when factories have reopened has been a well publicized struggle. Not only are many workers now unavailable to take up these jobs, but they are demanding higher wages in an economy that has seen their household bills skyrocket.

As the supply chains have struggled to cope with lockdowns and increased demand from consumers, it has made manufacturing in these areas a difficult task. With the world slowly returning to normal, there are new challenges now rearing their heads in the sector.

Will slow economic growth impact the durable goods sector?

The potential for a slowdown in economic growth is likely to be a major concern for companies who manufacture durable goods. By definition, these items tend to be expensive purchases that are made infrequently.

Some areas, such as military spending, are less likely to be impacted, but any company that relies on retail consumers will probably be worried.

Not only do consumers make durable goods purchases less frequently than other items, there is also often a discretionary element to their spending habits. It’s not that often that a refrigerator, a TV, a car or a lawnmower completely dies and needs to be replaced.

Often, consumers will look to upgrade these items when they have spare cash, and in an economy where household budgets are being stretched, they’re more likely to put up with an old TV and not look to splurge on a new one.

What does this mean for investors?

The durable goods sector is a wide ranging one that covers many different industries. One of the key takeaways from the report is that inflation is impacting the sector, just as it is impacting so many other aspects of the economy.

One of the strategies to really consider right now is how to protect your portfolio against the effects of inflation. At Q.ai we think this is really important, and it’s why we created our Inflation Kit.

This Investment Kit looks to take positions in a range of different assets that have traditionally held up well in a high inflation environment. It’s a low risk investment which holds a mixture of ETFs that hold Treasury Inflation Protected Securities (TIPS), as well as gold, other precious metals and commodities.

Every week, our AI automatically rebalances the portfolio to find the best mix for optimal risk-adjusted returns. If you’re heavily invested in stocks right now, this Kit can help provide a defensive edge to your portfolio.

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