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Durable Goods Devil In The Details And The Big Picture

“Durable Goods Orders Rise 4%,” blared the headlines this morning. There was just one minor problem with that. It was not true. It represented the seasonally adjusted, massaged, and manipulated number, which bears no semblance to reality. The mainstream media always reports just the seasonal hocus pocus while ignoring the actual number. That actual number for July, before application of statistical hocus pocus, in other words, not seasonally adjusted (NSA), showed orders down 11.8% versus June.

The truth is that that’s not too bad for July, which is always a down month as people head for vacations, but it’s not as good as the headline number implies. Last year July was down 12.8%, and in 2009 it was down 7.9%. One thing that is apparent in the long term trend of the data is that as manufacturing has become more efficient, the volatility of the data has lessened. The fact that July’s decline was “only” 11.8% should be viewed in that context. If the seasonal adjustment is factoring all the years when 15-20% declines were the norm in July, then it is bound to understate this month’s decline, turning a loss into a gain. This problem is common in many of the government’s seasonally adjusted data reports.

Durable Goods Orders and Stock Prices Chart- Click to enlarge

Sometimes the devil is in the details, and sometimes it’s in the big picture, and this is where this report becomes potentially more troubling. Over the past 18 years, a rollover of the 12 month moving average of actual NSA durable goods orders typically occurs about 1/3 of the way through a bear market in stocks. This measure now appears to be right on the cusp of such a rollover. It’s not there yet. It could happen in August if durable goods orders are weak, or this could turn out to be a false alarm if August’s data is strong enough.

August typically shows a rebound of at least 75% of the July drop.  Therefore, anything less than a recovery of 3/4 of July’s drop would be a sign of weakening that would suggest that the decline in stock prices has much farther to go, both in time and price. A strong rebound in durable goods orders would leave the issue in doubt from this perspective.

At market tops, this data tends to lag stock prices, so it is basically useless for timing a market top, but once it turns lower, it may give us an indication of how much longer and deeper the market decline may run. We are not at that point yet. Maybe next month.

While the headlines are misleading, at this point this news, and the misinformation surrounding it, is just a big “so what.” It is inconclusive. Furthermore, manufacturing represents only about 12-13% of US GDP, and durable goods are only about 45% of that. So at roughly 5% of GDP, this isn’t exactly representative of the US economy.

While we wait for a confirming signal from this series, the stock market remains its own best indicator. I track the data behind the market averages daily in the Wall Street Examiner Professional Edition. If you are not already a subscriber, you can try the service risk free for 30 days. That data suggested as early as February that stocks were building a major top and would enter a bear market this year. Those signals look pretty good so far. As far as durable goods are concerned, we’ll have to wait at least another month for confirmation of the stock market’s bear market signals.

1 Comment

  1. Lee Adler

    This note came from David Stockman-


    Good points, but the SA bias could be even worse because the auto sector has eliminated much of the traditional July shutdown. Note that durables less civilian aircraft were up on a SA basis only because auto orders (motor vehicles and parts) were up 12% SA, but down 20% NSA. By contrast, less seasonal stuff like electrical equipment and appliances, machinery and computers/electronics were all down even on the SA basis. Perhaps add “mangled and maligned” to manipulated and massaged! I much enjoy your work.

    Best regards,

    David Stockman”

    Thanks to David Stockman for his thoughts and kind words!

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