Gardner Intelligence Blog

Durable Goods Orders Hit Peak Growth

New orders for real durable goods in November 2018 totaled $244,576 million. Compared with one year ago, new orders grew just 1.9 percent. This was the fifth consecutive month of growth, but it was the slowest rate of growth since June 2018 and the second slowest since October 2017. While the one-month rate of change grew for the 17th  time in 18 months, the annual rate of growth decelerated to 6.0 from 6.5 percent. This was the slowest rate of annual growth since June 2018.

It seems clear that the rate of growth in new orders of durable goods has peaked and will grow slower heading into 2019. This becomes more likely when looking at the trend of real consumer durable-goods spending, a good leading indicator of real new orders in durable goods. Spending growth has slowed sharply the last couple of months, indicating slowing growth in new orders.

Registering 53.9, the Gardner Business Index (GBI) began the new year indicating improved business conditions after posting a series of slowing growth signals during the final quarter of 2018. This latest result raises the Index back into the range of growth readings from earlier in the current business cycle. Over the last two years, the GBI has averaged a reading of 56.1, including a historically high reading of 60.1 in February of 2018. As a result of the Index’s climb towards its all-time high a year ago, the latest reading compared is down 7.0 percent from a year ago. Gardner Intelligence’s review of the underlying data for the month indicates that the Index – calculated as an average – was supported by production, supplier deliveries and new orders. The components which lowered the Index included employment, backlog and exports. Only exports reported a contractionary reading during the month.

For the first time since April of 2018, production expanded faster than supplier deliveries, with the reading for production increasing markedly while the expansion in supplier deliveries slowed. This intersecting of the two readings may be an early indicator that supply chains are close to being – or have become – balanced with current levels of production. This change comes after supplier delivery readings spent most of 2018 attempting to catch up with the unusually strong rise in new orders, which peaked in early 2018 and has been highly elevated by historical standards since early 2017.

The electronics industry entered 2019 overshadowed by concerns of shrinking demand for electronics goods in China, joined with tepid demand in the U.S.  This was capped by Apple’s January 2nd announcement of weaker-than-expected fourth-quarter 2018 sales of its core electronics products.  Such headwinds at the start of the year combined with an extended U.S. government shutdown and prolonged tariff negotiations with China to generate concern among many businesses. These events have complicated matters for those looking for insights into what 2019 may hold and how to respond in the face potentially greater near-term volatility.  These early announcements sent the Dow Jones Industrial Index into a frenzy during which it fell more than 10 percent in the course of just a few weeks in December.  This was in part because Apple’s shares constitute a nearly 5-percent stake in the Dow Jones Industrial Index and more than a 10-percent stake in the Nasdaq 100, according to Factset.

Examining the electronics industry – less Apple’s share – illustrates an industry that is expected to see inflation-adjusted revenue growth of 3.5 percent in 2019, combined with even stronger earnings growth. This is based on the actual and forecasted financial results of nearly 60 electronics industry firms generating $658 billion in revenues in the 12-month period ending with the third quarter of 2018.  Including Apple’s third quarter 2018 projections pushes the industry’s overall revenue higher to 8.5-percent by year-end 2019. From a domestic perspective, the sector seems expected to mirror the overall economy’s growth; however, firms with greater exposure to China may have to be more cautious during the year.

Capacity Utilization Reaches Highest Rate in Four Years

Durable goods capacity utilization was 77.5 percent in December 2018, which was the fifth month in a row with a rate greater than 76 percent, in addition to being the highest rate of durable goods capacity utilization in four years. Virtually the entire second half of the year was revised higher. That’s good news for capital equipment consumption.

December’s one-month rate of change was 3.9 percent, which was the fastest rate of growth since July 2014. Annual growth in durable-goods capacity utilization reached 2.1 percent, accelerating for the seventh-consecutive month to its fastest rate since March 2015. Again, that’s good news for capital equipment consumption. The annual rate of growth in durable-goods capacity utilization tends to lead capital equipment consumption by seven to 10 months.

Production Grows Much Faster than Historic Average

In December, the index for durable-goods production was at 106.7. While this was the lowest reading since July 2018, December’s index grew 4.7 compared with one year ago. That was the second fastest month-over-month rate of growth since July 2014. It was the third time in five months that the growth rate was faster than 4.0 percent, and December’s rate of growth was 38 percent faster than the historic average month-over-month rate.

The annual rate of growth, which is easier to correlate with other data points, continued to accelerate in November. The rate of growth accelerated for the seventh-straight month, reaching 3.4 percent, the fastest rate of annual growth since May 2013. It was the first month with faster-than-average annual growth since May 2013, as well. The accelerating growth trend will continue for at least the next couple of months, which is a positive sign for capital equipment consumption.

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