Know Your Numbers: Durable Goods

At first glance, it may seem like overkill that various organizations and government agencies have so many different ways to measure certain aspects of the economy. After all, with a few macroeconomic indicators like gross domestic product, international trade measured by the U.S. current account, and business cycle indicators such as the index of leading economic indicators, you can get a good sense of the direction of the overall economy.

However, like a digital picture without enough pixels, views of the overall economy often lack focus and clarity on specific aspects of current economic conditions. Although the state of the entire economy is important to everyone, many people are interested only in particular segments of the economy that have a relatively large impact on their lives. For instance, if you work for a car dealership selling DaimlerChrysler (NYSE: DCX  ) vehicles, you'll be especially interested when competitors like Ford, General Motors, Toyota (NYSE: TM  ) , and Honda (NYSE: HMC  ) release their sales figures.

In choosing certain subclasses of the economy to analyze, economists tend to select areas that not only have significance taken separately but also have a marked impact on the overall economy. One such indicator is the Census Bureau's report on shipments, inventories, and orders for durable goods. This article examines the purpose behind measuring the output of durable-goods manufacturers and provides some insight on how the durable-goods numbers reflect activity in the overall economy.

The basic concept
The Census Bureau's stated purpose in compiling data on durable goods is to measure future production commitments in the manufacturing sector and to allow inferences about the health of the economy as a whole. To gather data, the Census Bureau conducts a survey of those manufacturing companies with annual shipments of $500 million or more. The survey collects several different types of information, including the value of all goods shipped during the month, new orders received for goods, the backlog of orders that the manufacturer has not yet shipped to customers, and a breakdown of the overall inventory of raw materials and supplies, goods in the middle of the production process, and finished goods ready for shipment.

What constitutes a durable good for purposes of the survey is fairly broad. Manufacturers of several different kinds of consumer durable goods are included, including makers of audio and video equipment like Eastman Kodak (NYSE: EK  ) and Fuji (Nasdaq: FUJIY  ) , lawn-and-garden equipment manufacturers like John Deere (NYSE: DE  ) , and furniture makers like Ethan Allen (NYSE: ETH  ) and Bassett Furniture (Nasdaq: BSET  ) . In addition to consumer goods, aircraft and other defense-related goods from companies like Boeing (NYSE: BA  ) and a large selection of capital goods other manufacturers use to help in creating products are included in the survey. These items range in scope from vending machines to farm machinery, from electrical turbines to medical instruments. In essence, most manufactured goods that aren't designed for quick consumption find their way into the category of durable goods.

In presenting the data, the Census Bureau often provides figures that exclude certain classes of manufacturing, such as transportation and defense-related industries. Because these industries often involve goods with extremely high costs, such as commercial airliners and military jets and tanks, a single order can have a big impact on the numbers. To smooth the month-to-month data, the report makes comparisons both including and excluding these volatile categories.

Economic implications
Various groups use the information presented in the durable-goods report for a number of purposes. Within the government, the durable-goods figures are used as a component in calculating other important data, including the national gross domestic product. The part of the report dealing with consumer durable goods is used as one of the components of the index of leading economic indicators. The Federal Reserve, in compiling its Beige Book, frequently cites durable goods information; the numbers are among the factors that the Fed considers in making decisions on interest rate policy.

By looking at the data presented in the durable-goods report, you can see a snapshot of the condition of the manufacturing sector of the economy -- a picture that gives valuable hints about future activity. Information on shipments and current inventory levels gives some insight into the present condition of the manufacturing industry; high levels of shipments with low inventories tend to suggest a strong manufacturing sector. Data on new orders and unfilled orders can give a sense of what the immediate future looks like for manufacturers; if new and unfilled order levels are high, then manufacturers will have plenty to do to fulfill their contracts, suggesting strength in the coming months and quarters. On the other hand, high levels of inventories, especially in finished goods, can indicate a glut in production, predicting the possibility of temporary plant shutdowns or employee layoffs until manufacturers find buyers for the goods that they have already produced. Today's report, for instance, announced stronger shipments and unfilled orders, indicating good current activity, but new orders fell and inventory rose, indicating the possibility of a slowdown in coming months.

For investors, durable-goods data can give valuable information about expectations of manufacturing activity in the near future. Because manufacturing companies often experience repeating cycles of successful and challenging business environments, knowing the current state of the manufacturing economy can be helpful in determining whether a given stock price is justified or not. If you fail to understand the cyclical nature of these companies, you may often draw incorrect conclusions from what may appear at first glance to be pricing aberrations in their stocks.

In summary, information on durable goods provides a close look at the manufacturing sector, which has a substantial impact on the overall economy. By identifying and recognizing trends in manufacturing activity, you can better predict economic conditions and use your knowledge of the economy to inform your investment decisions.

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Fool contributor Dan Caplinger thinks if goods were truly durable, he'd never have to buy any more of them. He doesn't hold positions in any of the companies mentioned in this article. The Fool's disclosure policy never needs to be replaced.


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