The economic report du jour can be dramatic, it may spawn a sea of commentary and it may move markets. The latest numerical update sometimes reflects the larger trend in the data series, too. But one has to remember that statistical noise all too often clouds the true story.
That’s worth considering in the wake of today’s encouraging report on durable goods orders. We can’t say for sure if the data’s pulling a fast one on investors today or if the upturn is the real deal. For that matter, we can’t ever be sure until the passage of time delivers its always flawless dose of clarity. So, what’s a strategic-minded investor to do? Waiting a year isn’t practical, but neither is rushing to judgment based on the last number to hit the Street. The middle ground is taking a longer term view of the cycle in the here and now. True, the future is still unclear regardless, but at the very least it pays to have solid insight about where we’ve been and how the latest report fits in with the trend as it’s unfolded so far.
With that in mind we offer the following chart, which graphs the 12-month rolling percentage change in new orders for manufactured durable goods right up through today’s December 2007 update. First, take note that new durable goods orders last month posted a strong 5.2% rise from the previous month. In fact, December’s jump was the highest since July. In addition, a monthly gain north of 5% is fairly rare, occurring only 10% of the time over the past 10 years. Clearly, one shouldn’t undervalue the potential significance in last month’s report. In addition, December’s gain marks the second straight monthly gain in new durable goods orders, which is considered a gauge of future economic activity.
But the bullish aura described above is tempered when you put last month’s gain in broader context with durable goods orders over the years. As the above chart reminds, the strength in December’s report doesn’t reverse the overall trend of the past two years, which is unmistakably down. Smoothing the volatile durable goods orders reports by comparing annual changes over time reveals a slowdown that appears to have momentum. The good news is that the slide remains mild, so far, compared to the previous slump in 2000 and 2001, when new orders for durable goods routinely shrunk by 5% to 20% on an annual basis.