What Rising Consumer Goods and Material Orders Signal

New orders for consumer goods and materials give investors an insight into the demand for goods and form an important constituent of the Conference Board LEI (Leading Economic Index). Changes to demand in the consumer goods sector impact the performance of FMCG (fast moving consumer goods) companies, which include large retailers such as Walmart (WMT). Higher demand reflected through new orders is a positive economic sign.

According to November’s manufacturing report, new orders for consumer goods and materials have continued to increase. Manufacturing new orders rose from an upwardly revised October reading of 136,837 to 137,005 in November. This economic indicator, which has an 8.2% weight in the LEI, had a net positive effect of 0.01 (or 1%) in November, compared with 3% in October. The report suggests that new orders have increased but at a slower pace.

The SPDR Consumer Staples Select Sector ETF (XLP) and Vanguard Consumer Staples ETF (VDC) are two major funds in the consumer goods sector. This sector is considered defensive, as some products stay in demand even in economic downturns. During economic upcycles, personal products and beverages (PBJ) see higher demand than household (KXI) products, which has been the case in the last few years. A similar trend can be expected in 2018. In the next part of this series, we’ll analyze how the Institute of Supply Management’s New Orders Index has affected the LEI.