Gardner Intelligence Blog

Has Growth in Durable Goods Orders Peaked?

New orders for real durable goods in September 2018 were $267,313 million, the third highest total since June 2017. Compared with one year ago, new orders grew 3.7 percent, the third consecutive month of growth. While the one-month rate of change grew for the 15th time in 16 months, the annual rate of growth decelerated to 6.3 percent. The annual rate of growth has hovered between 5.6 and 7.0 percent since May, indicating that the rate of growth has likely peaked this cycle.

Motor vehicle and parts orders rose 5.1 percent compared with one year ago, growing for the eighth time in nine months. The annual rate of growth accelerated for the third straight month and will likely do so for another couple of months before peaking. 

The Gardner Business Index (GBI) closed October slightly lower than the month prior at 55.7. In the year-to-date period, the index has averaged 57.6, keeping 2018 on track to be the fastest expanding year in recorded history, breaking the record 2017 currently holds at 55.3. For the month, the index is down 1.1 percent compared to the same month one year ago. Gardner Intelligence’s review of the underlying data for the month indicates that the Index was driven higher by supplier deliveries, production and new orders. The components which lowered the index’s average-based calculation included employment, backlog and exports. The rate at which exports eroded during October quickened, resulting in the lowest reading since the fourth quarter of 2016.

In general, the trends in October mirror those reported in recent months.  The  reading of supplier deliveries continues to register as the fastest growing component among all other index components.  Prior to the current economic cycle, the highest reading ever recorded for supplier deliveries was 59.3 in early 2012.  However, since February of this year, supplier deliveries have registered an uninterrupted chain of readings above that 2012 high.  The readings for all components less exports during October were within their range of recorded values over the last six-months.  Recent volatility among the business index components may be a result of industries seeking to position themselves in preparation for – or as a result of – international tariffs which in total are affecting hundreds of billions of dollars in internationally traded good.

Those who watch the news about the housing market in 2018 have heard a lot of lackluster news. Several stock indexes which track the housing sector such as the iShares U.S. Home Construction ETF (ITB) and SPDR S&P Homebuilders ETF (XHB) have both fallen over 30 percent between their first quarter 2018 highs and their valuations as this article went to press. Equities analysts in this sector see unaffordable home prices, the rising costs for home building materials and rising interest rates as three of the most significant factors restricting greater growth in the market. But when we see price as merely the tool that balances supply with demand, and if we think about how limited supplies and strong demand can influence prices, then the picture of the market looks significantly different.

On the supply side, U.S. New Housing Permits during the first three quarters of 2018 averaged 111,000 units monthly, the highest reading since 2007 and more than double the 2009 average. According to Realtor.com, the average U.S. home in September was on the market for 65 days, down 6 percent year-over-year, while prices are up 7 percent during the same time. However, in many non-rural markets the median days on market has been far shorter while median home prices have grown much faster. This data, combined with the well-known fact that manufacturing and construction labor is in incredibly short supply, is one of the greatest reasons that the volume of new homes being constructed is not higher. 

Disposable Income Grows Steadily

In September 2018, real disposable income was $15,651 billion. As is normally the case, real disposable income set an all-time high this month, up 2.9 percent from one year ago. The rate of growth was either 2.9 or 3.0 percent for the fourth month in a row, which was just below the historical average rate of growth of 3.1 percent.

The annual rate of growth remained unchanged at 2.8 percent, as it has since February. This was the fastest rate of annual growth since May 2016, but the rate of change was abnormally flat. Even though the rate of growth has plateaued, it was still a positive sign for durable goods manufacturing.

Durable Goods Spending Remains Strong

In September, the month-over-month rate of growth for durable goods spending was 6.4 percent, which was the second month in a row and the 12th in the last 13 months with above average growth. The annual rate rate of growth was 6.8 percent, hovering between 6.6 and 6.9 percent since July 2017. This was significantly above the historical average growth rate of 5.4 percent

Real consumer durable goods spending in August 2018 was $1,716 billion real dollars (seasonally adjusted at an annual rate), which was an all-time high. Also, durable goods spending accounted for 13.2 percent of all consumer spending, which was also an all-time high.

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