Durable Goods Orders

How important is it?

The durable orders release measures the dollar volume of orders, shipments, and unfilled orders of durable goods which are defined as goods whose intended lifespan is three years and over. Orders are considered a leading indicator of high production in the economy since most of them are in the form of machinery and equipment used in the construction or manufacturing and mining industries. The market often moves on the report despite the volatility and large revisions that may make it less accurate.

How is it computed?

The statistic is gathered by looking at the breakdown of orders given by the Census bureau of the department of commerce. The total number is often inaccurate due to the huge increases in aircraft and defense orders. There are two main ways of computing this information namely; direct estimation method and commodity floe method. Selected commodities in the PCE and PDE categories are directly estimated from source data. Direct estimation is used when by definition, the commodity is purchased only for consumption or by business for investment; e.g. the rental value of owner-occupied homes is attributed exclusively to persons. Direct estimation is also used when the underlying estimation method results in a more accurate and reliable estimate; Commodity -flow method consists of seven steps, converts domestic output in producers’ prices to domestic supply in purchasers’ prices and therefore includes imports and excludes exports. The domestic supply is then allocated to domestic purchasers who may be persons, businesses or even government.

Impact on forex

The durable goods orders have an influence on the forex in the sense that it determines the rate of foreign currency into and out of the country depending on the sources f the ordered goods. Durable goods ordered from outside the US are likely to raise the forex rates for the currencies of those states. If they are ordered from within then it is likely to maintain a stable pace as there is not likely to be an increase in demand for any external currency to transact business. It is worth noting that most of the revenue is used in the purchase of durable stuff and it therefore has great influence on the volumes of money spent towards payment whether for international order or local orders. These have a direct impact on the forex market.

Impact on the stock market

Other than wages and other recurring costs such as consumer expenditures, this sector has the largest volume of money spent. The good thing is that money spent in the purchase of these types of goods means a direct increase in production and hence positive economic growth I anticipated. Basing on this assumption, it is automatic that when there are big orders of durable goods, the investors anticipate growth and this perception automatically inspires investment into the sectors that are making big orders. When new companies are planning to setup investments into the economy, they start by purchasing machinery, equipments and software that will facilitate production. It is therefore easy to foretell that new employment opportunities are likely to arise with the purchase of such equipments. If the orders go towards existing companies that need to expand, the market will take it to mean that the companies have already found new demands to meet and that is why they are opting to expand in preparation to exploit the demand. These are the situations that investors look out for. They will therefore start scrambling for the said company’s shares.

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