An Unexpected Drop in U.S. Durable Goods

By: Susanna G. Kim, The New York Times

Commentary:

There was another wake up call on Wednesday as durable goods orders were off again (second month in a row). The figures for June were off 1% from May’s .8% drop. The drop was the largest since August and it sent a wave of worry over Wall Street.

Durable goods are typically seen as a sign of consumer confidence on the stability of their future. Most durable goods come with a long-term debt commitment of some sort and are usually purchased by consumers that are confident about their job prospects for the future. That, coupled with the report on consumer confidence is enough to make everyone take pause. Especially impacted may be the retail purchasing or supply chain manager.

Again, in 2009 when companies came out of the 2008 holiday shopping season with far too much inventory – they faced the prospect of losing out to the liquidity battle. The banking sector had just narrowly survived what we know now to be a near collapse – and frankly they were scared. Corporate lending through the banking sector tightened drastically and cash started to run out for many companies. Corporations around the world will avoid a repeat of Q1 2009 at all costs. These reports of consumer confidence waning, durable goods orders off, and some lackluster reports from a few bellwether companies about the third and fourth quarter could slow orders and reduce order quantities for retailers. For the transportation sector, this will play out as smaller shipments moving through faster networks (less order cycle time from manufacturing to the shelf).

As mentioned in prior analyses, spikes in container rates would suggest that an inventory building cycle is underway during what would be the normal beginning to the peak season, but analysts are concerned that this might not be sustainable. We’ll have to watch the rest of the earnings season and then track with port and rail activity in the third quarter to get a reading on what is happening.

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