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April’s Durable Goods Orders Report a Mixed Bag

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The durable goods report

The “Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders” is more commonly known as the durable goods orders report. Released by the United States Census Bureau, the report provides data on orders received by durable goods manufacturers that make goods that last three or more years. The final report, known as the new factory orders report, is released with a month’s lag.

The report is important because it indicates business sentiment. A rising number indicates that businesses are confident. New orders for long-lasting goods wouldn’t be placed unless there’s confidence that businesses can sell the goods.

This release tells us about the profitability of factories, given that an increase in orders means they will be busy fulfilling those orders for the months to come.

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Orders fall

Durable goods orders fell by 0.5% in April 2015 to $235.5 billion, after having surged by 5.1% in March. Durable goods orders have fallen in two out of the past three months. The strength of the US dollar continues to hurt manufacturers. Also, oil companies continue to refrain from placing orders for new equipment due to the still depressed crude oil market.

The primary reason for the fall in durable goods orders was in fact driven by a fall in aircraft orders. The transportation equipment category is considered volatile. Excluding this category, new orders increased by 0.5% month-over-month. New orders for transportation equipment fell by 3.5% in April, following a 15.2% rise in the previous month. Orders for defense aircraft declined by 12.8% in April after having rocketed upward by 120.4% in the previous month.

Business spending rising

Orders for non-military capital goods excluding aircraft are considered a fair proxy for future business investment. They rose 1% in April, much faster than expected, following a 1.5% rise in the previous month. The rise in March was upwardly revised from a 0.1% rise reported earlier.

Meanwhile, shipments of non-military capital goods, excluding aircraft, are used for calculating US economic output. They increased by 0.8% in April, following a 1% rise in March.

Importance

Defense equipment and commercial airplane manufacturers are high-value and keenly tracked companies. So, this report can help you assess the future profitability of companies like Lockheed Martin (LMT). Automaker stocks including Ford (F) and General Motors (GM) are also closely watched.

Transportation-focused ETFs such as the iShares Transportation Average ETF (IYT) and industrial-focused ETFs such as the Industrial Select Sector SPDR Fund (XLI) are also influenced by this report.

In the next article in this series, we’ll look at what the new home sales trend indicates.

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