Durable Goods Orders Rise, But Less than Expected

The nation's factory sector continues to recover, as durable goods orders rose a seasonally adjusted 0.3% in December, the U.S. Commerce Department announced Thursday. What's more, the core rate -- which excludes the often-volatile transportation component -- rose 0.9%, a healthy gain.A Bloomberg News economists' survey had expected December durable goods orders to rise 1.6%. Durable goods orders fell a revised 0.4% in November, down from the earlier-released 0.2% gain. Ex-transportation, November durable goods orders rose 2.1%.

However, for all of 2009, durable goods orders plunged 20.2% to $1.97 trillion -- the largest drop in durable goods orders since 1992, as businesses first reacted to the recession, then severely pared-back inventories as the financial crisis took hold. Shipments plummeted 15.9% in 2009 to $2.1 trillion, and inventories sank 11.7% to $303 billion.

In December, orders for core capital goods rose 1.3%, but fell 18.4% for all of 2009. Machinery orders jumped 6%, primary metals rose 8.1%, motor vehicle and parts orders increased 3.6%, electrical equipment orders declined 3.9%, and transportation orders declined 2%.

Durable goods orders are new orders by stores and businesses for immediate and future delivery of factory hard goods. These orders measure how busy factories are likely to be in the immediate months ahead for such items as refrigerators, washers and dryers, cars, computers, and industrial machinery.

Investors should follow the statistic because rising durable goods orders usually indicates that businesses are experiencing sustainable growth -- demand -- which generally translates into higher revenue and increased production by the manufacturing sector -- two bullish signs for the U.S. stock market.

Economic Analysis

Despite November's revised drop in orders, the overall durable goods picture remains a net-positive one for the U.S. economy -- one that shows incremental-but-steady momentum -- for two reasons. First, during the recession, businesses over-corrected and cut inventories well below what they should have, and they are now replenishing those depleted inventories. Second, demand from foreign sources -- aided by the weaker dollar, which make U.S. goods cheaper for foreign buyers -- remains good, which points to continued, healthy gains in U.S. exports.

Taken together, inventory replenishment and foreign buying should keep the demand for durable goods rising and provide a boost to U.S. GDP in the immediate quarters ahead. In Q3 or Q4 2010, however, domestic demand will have to play a larger role -- and that requires sustained increases in household formation, which is dependent on job growth.
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