We’re continuing with our series of articles on fundamental analysis. Today, we are going to take a look at another fundamental indicator, i.e., the durable goods orders. It’s usually marked with two signs of importance in the economic calendar, thus having a moderate impact on national currency volatility.
The term “durable goods orders” is a macroeconomic indicator that reflects the amount of orders for products with a lifetime of more than three years. This category includes cars, defense products, furniture, building materials and a number of other household goods.
Along with this data, we have the basic orders—these are the durable goods orders excluding transport.
Passenger and freight vehicles represent a large share in this indicator, roughly three-fifths of the total amount. The rest are the household products, building materials and furniture orders.
To learn more about the durable goods orders, you should make a calculation based on two elements:
1. Consumer materials and finished products;
2. Industrial products (including the defense and non-defense products).
The non-defense products include eleven components and don’t take into account the aviation orders and spare parts. They account for about 20% of the total amount.
This macroeconomic indicator is an essential element of fundamental analysis since it allows you to indirectly understand what the GDP growth rate will be like, how the industrial sector situation is unfolding and what the general sentiment among consumers is. As a matter of fact, the question about the essence of durable goods can be answered as follows, “This is a proactive indicator.”
1. The growth in demand for durable goods suggests that consumers have money, and are ready to spend it on the said goods. When the population spends money, it speaks of its confidence in the future.
2. This indicator belongs to the industrial sector. If we have the upward dynamics, it means that the industrial sector is developing, and the leading PMI index will increase, which will have a subsequent impact on the GDP rate.
3. The growing industrial sector enhances the confidence of the investors—they start investing in industrial stocks, which supports this stock market segment and partially impacts the Dow.
4. Finally, you can find out about an economic downturn beforehand if the level of this indicator is dropping.
This indicator is especially interesting when it comes to the USA:
In the United States, the data on the basic durable goods orders becomes available simultaneously with the general orders.
The five-year data chart demonstrates that volatility of this indicator has practically remained unchanged since 2015. A flash crash was observed in early 2020 due to the lockdown amid the coronavirus pandemic.
The annual histogram proves that the most dramatic drop occurred in March and April, and then we witnessed a significant recovery for three months.
As this indicator directly impacts the exchange rate, a sharp volatility surge is a rare thing at the time of its publication. When this is the case, it won’t be easy to take profit manually by using news trading strategies. That being said, it’s important for your fundamental analysis coupled with other indicators, as it can help you identify the future trend in advance.
Next time, we’ll talk about other important indicators, e.g., jobless claims.