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The "Real" Goods on the May Durable Goods Data

June 23, 2015

by Doug Short

Earlier today the Census Bureau posted the Advance Report on April Durable Goods New Orders. This series dates from 1992 and is not adjusted for either population growth or inflation.

Let's now review Durable Goods data with two adjustments. In the charts below the gray line shows the goods orders divided by the Census Bureau's monthly population data, giving us durable goods orders per capita. The blue line goes a step further and adjusts for inflation based on the Producer Price Index for All Commodities, chained in today's dollar value. This gives us the "real" durable goods orders per capita and thus a more accurate historical context in which to evaluate the conventional reports on the nominal monthly data.

We've included a callout in the upper right corner to document the decline from the latest month from the all-time peak for the series.

Real per Capita

Economists frequently study this indicator excluding Transportation or Defense or both. Just how big are these two subcomponents? Here is a stacked area chart to illustrate the relative sizes over time based on the nominal data. We've also included a dotted line to show the relative size of the Core Capex subset, which we'll illustrate in more detail below.

Durable Goods Components

The next chart is similar to the first one except that it excludes the volatile Transportation component, the series usually referred to as "core" durable goods.

Core per Capita

Now we'll exclude both Transportation and Defense for a better look at a more concentrated "core" durable goods orders.

Core ex Defense per Capita

Here is the chart that gives the most accurate view of what Consumer Durable Goods Orders is telling us about the long-term economic trend. The six-month moving average of the real (inflation-adjusted) core series (ex transportation and defense) per capita helps us filter out the noise of volatility to see the big picture.

6-month Moving Average

The Trend in Capital Goods

Finally, let's take a big step back in the sales chain and look at the popular series often referred to as Core Capex -- Nondefense Capital Goods New Orders Excluding Aircraft (capital goods are durable goods used in the production of goods or services), shown here on a per-capita basis, nominal and real.

Core Capex per Capita

Here is the real per-capita Core Capex smoothed with its six month average for a better sense of the trend. This metric has been moving in the right direction for the past sixteen months, but it remains well below its pre-recession levels.

Core Capex per Capita

The Long-Term Trend

As these charts illustrate, when we study durable goods orders in the larger context of population growth and also adjust for inflation, the data becomes a coincident macro-indicator of a major shift in demand within the U.S. economy. It correlates with a decline in real household incomes, as illustrated in our analysis of the most recent Census Bureau household income data:

The secular trend in durable goods orders also helps us understand the long-term trend in GDP illustrated elsewhere. See especially the most recent update on GDP.

As we can see from the various metrics above, revisions notwithstanding, the real per-capita demand for durable goods had increased since the trough at the end of the last recession. But new orders remain far below their respective peaks near the turn of the century and earlier. A key driver, or lack thereof, for healthy growth in durable goods orders is growth in household incomes. For a perspective on this point, see our latest update on Median Household Incomes, data through last month, which are down substantially since the end of the Great Recession.

See also this pair of commentaries focusing on the Sentier Research report on the fifth anniversary of median household incomes since the end of the Great Recession: