Trading News for Beginners – What Are Durable Goods Orders?
What’s are the differences between a suit and a car? There are more differences than you might think.
In economic terms, non-durable goods like clothes and durable goods like cars are intended for consumer use in different ways. People buy, use and throw away suits relatively quickly. A car is driven over a period of years and considered to be durable because it lasts longer. The other key difference is that a car costs a lot more than a suit.
The cars you purchase are durable goods, so are washing machines, computers, lawnmowers and other machinery. If products last longer than three years and the costs are relatively high, they’re categorized as durable goods.
Consumer spending and durable goods orders
Consumer spending describes the amount of money households and businesses use to purchase durable and non-durable goods. Governments and financial analysts carefully research how much growth there is in the category of durable goods spending because the benchmark shows how confident consumers and businesses feel toward investing in higher ticket goods.
When the economy is growing and the job market is healthy, consumers will tend to feel more confident to spend their cash or take out a loan to purchase a vehicle. If the economy is shrinking and jobs are scarce, consumers react differently and delay buying these more expensive goods.
This behaviour applies at the individual level and the business level. In a weaker economic climate, businesses are more likely to delay installing expensive electronics and office equipment. A better economic outlook might push businesses to invest in new machinery and equipment.
Durable Goods Orders measures how many orders there are for these types of goods over a period of time – a month, a quarter or a year. The benchmark is a leading indicator, meaning that the results are used to forecast the probability of an economic trend such as growth or recession.
If the monthly Durable Goods Orders report shows growth, investors can reasonably assume that the economy is on an upward trend because they’re a significant contributor to GDP. If Durable Goods Orders results are weaker compared to the previous month, investors can assume there is a short-to-medium term risk of recession or a period of lower growth in the economy.
What can Durable Goods Orders tell us?
Durable goods orders reports tell us:
- The rate of increase or decrease of new orders of manufactured goods
- The rate of increase or decrease in the shipment of new goods orders
- The decrease or increase in unfilled orders (showing whether demand is strong)
- Whether inventories of durable goods have risen or fallen
- The level of orders for defense and transportation goods
How do traders and investors use Durable Goods Orders?
Forex traders and Stock investors use Durable Goods Orders in different ways.
In the scenario of weaker Durable Goods Orders, Forex and CFDs traders would focus on the currency pair affected by the report. For example, in some economic conditions, US Durable Goods Orders results could weaken the US Dollar versus other currencies in this scenario.
In the scenario of stronger Durable Goods Orders, a Stock investor may choose to invest more in the commercial jet sector or the defense sector.
Example of trading on Durable Goods Orders reports
In this scenario, Durable Goods Orders in the UK have fallen and show negative growth.
Forex and CFDs traders are likely to take this as a sign of a weakening economy in the UK and may short-sell the GBP. As a result, the GBP would decline against other currencies and CFDs traders who shorted the GBP would gain on the price difference between their entry and exit points.
This case shows how weaker confidence in UK economic growth prospects can affect trading decisions in addition to other factors.
Example of investing during Durable Goods Orders reports
In another scenario, Durable Goods Orders in the UK have risen and show positive growth.
Stock investors are likely to research the level of demand for specific goods like airplanes, trucks or other vehicles and could buy more stocks in that sector. Investors could also boost their investment in underlying commodity markets like steel, which is heavily used in manufacturing processes.
This scenario shows rising confidence in the UK’s economic growth prospects.
The timing of Durable Goods Orders reports can be seen on Admirals Forex Calendar and bear in mind that these reports are the source of many and varied trading and investing ideas.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.