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Can US Durable Goods Give US Indices a Push?

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US indices fell rather dramatically in the last two sessions. There were a couple of factors contributing, but the Jackson Hole symposium later in the week is seen as a risk catalyst. But in early trading today, better than expected PMI in Europe helped bring back some risk appetite.

With generalized concerns over the health of the US economy, Durable Goods could prove to be an important point for risk sentiment. Investors and CEOs can talk about where they see the economy going, but it’s where they put their money that really counts.

What’s a stake

Durable goods are seen as a barometer of expectations of the economy, because they represent large investments that firms expect to recover over a period of several years. They are also typically more discretionary since a company doesn’t have to open a new factory as much as it has to buy supplies. Increasing durable goods, therefore, is generally seen as a sign that businesses feel they have enough funds in the short term and expect growth in the medium to long term.

This is particularly relevant in periods of higher interest rates, since a lot of durable goods are bought on credit. With rising interest rates, businesses need a higher rate of return to justify taking out loans to buy more equipment. Consumer sentiment can be a little more fickle, as people respond to headlines. Businesses typically take a more measured and studious approach before spending large amounts of money.

What matters in the data

Some distortion can enter durable goods orders on two fronts, but the most relevant right now is defense. Increased defense spending because of heightened geopolitical tensions can inflate the durable goods orders number. Defense spending is discretionary on the government, so the ex-defense figure typically is what the market focuses on.

Though lately there is more interest in the transportation numbers, because automobile production has been curtailed. But industrial transportation has been increasing. Paccar, for example, reported new truck deliveries up 17% over last year. If the economy is going to recover, and supply chain issues resolved, then more trucks are going to be needed, along with more railcars. On the other hand, economic underperformance could weigh on the sale of aircraft.

What to look out for

Headline July Durable Goods Orders are forecast to slow to 0.6% growth compared to 1.9% prior. This comes in conditions when monthly inflation was reported as flat. Durable goods excluding transportation are expected to have grown 0.2% compared to 0.3% in June. Durable goods excluding defense are expected to come in at 0.3% compared to 0.4% prior.

From the projections, we can see that the largest variable is transportation, with investors expecting firms to have cut back on their spending. This is understandable after major retailers such as Walmart, Target and Home Depot reported having large inventories.

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