skip navigation
Blog

Stay up to date on timely topics and market events. Subscribe to our Blog now.

ECONOMY
November 25, 2020

Durables Orders Rise Further—Factory Sector Rebound Has Months to Go Yet

By Michael J. Bazdarich, PhD

Stay up to date on timely topics and market events. Subscribe to our Blog now.

New orders for durable goods rose 1.3% in October, on top of a slight 0.1% upward revision to September. Excluding the volatile transportation equipment group, durables orders also rose 1.3%, but with a substantial 0.6% upward revision to September. Focusing on new orders for capital equipment (excluding aircraft), orders there rose 0.7% in October, with a +0.9% revision to September.

The gains here show clearly that the recovery of the last six months has not been solely a consumer spending affair. As strong as the consumer spending data have been since May, the rebounds in business spending and even in exports have been impressive as well.

The Exhibit here focuses on shipments of capital goods in order to emphasize that the rebound there has not been just orders for future purchases, but actual production and shipment of these goods as well. Such shipments have bounced 15.2% from their April low and are up 3.7% from February, pre-Covid levels.

Exhibit 1: Shipments of Nondefense Capital Goods
Shipments of Nondefense Capital Goods
Source: Census Bureau. As of 31 Oct 20. Select the image to expand the view.

In fact, recent levels of capital goods shipments probably cannot be sustained at current levels. The same goes for orders for all durable goods and for retail sales and consumer spending on goods. For all these indicators, recent activity levels greatly exceed pre-Covid levels, evidence that businesses and consumers are making up for purchases not transacted during the shutdown.

This is typical of economic indicators. When activity levels are artificially constrained for a month or two, subsequent months’ data typically show activity levels bouncing way above pre-constraint levels and then, after a while, falling back to pre-constraint trends. In the past, we have seen such saw-tooth patterns during and after blizzards and labor strikes. It is no surprise to see similar patterns triggered by the Covid shutdowns. The question becomes how long current elevated levels of activity can last.

For shipments of non-aircraft capital goods, average levels for 2020 through October are about 1% below the average for all of 2019. In order to bring average levels since January 2020 back to 2019 levels, capital goods shipments would have to be maintained at October levels for another two to three months.

This is a good estimate of how long the currently elevated levels of capital goods shipments can continue. After sustaining such strength for another two to three months, it is likely that capital goods shipments will then fall back to the flat trends of 2018-19 evident in the chart. Such declines would not be a sign of weakness, but merely an indication that the post-shutdown catch-up in activity is complete.

For durable goods in general, the recovery since April has not been quite as robust as that for capital goods. In fact, September shipments of all durable goods were still below pre-Covid levels, so there, the recovery can strengthen further and be maintained quite a few months longer.

By the same token, one should ignore media alarms that recent slowing in growth rates of various aggregates is worrisome. The explosive growth rates seen in various aggregates over the summer were a one-time catch-up from severely depressed levels. They were not a sign of true strength, but merely of recovery from weakness. The slower recent growth rates are not a sign of weakness, but rather of a maturing recovery. Even Shaquille O’Neal stopped growing after a while, but he was still plenty tall.

© Western Asset Management Company, LLC 2024. The information contained in these materials ("the materials") is intended for the exclusive use of the designated recipient ("the recipient"). This information is proprietary and confidential and may contain commercially sensitive information, and may not be copied, reproduced or republished, in whole or in part, without the prior written consent of Western Asset Management Company ("Western Asset").
Past performance does not predict future returns. These materials should not be deemed to be a prediction or projection of future performance. These materials are intended for investment professionals including professional clients, eligible counterparties, and qualified investors only.
These materials have been produced for illustrative and informational purposes only. These materials contain Western Asset's opinions and beliefs as of the date designated on the materials; these views are subject to change and may not reflect real-time market developments and investment views.
Third party data may be used throughout the materials, and this data is believed to be accurate to the best of Western Asset's knowledge at the time of publication, but cannot be guaranteed. These materials may also contain strategy or product awards or rankings from independent third parties or industry publications which are based on unbiased quantitative and/or qualitative information determined independently by each third party or publication. In some cases, Western Asset may subscribe to these third party's standard industry services or publications. These standard subscriptions and services are available to all asset managers and do not influence rankings or awards in any way.
Investment strategies or products discussed herein may involve a high degree of risk, including the loss of some or all capital. Investments in any products or strategies described in these materials may be volatile, and investors should have the financial ability and willingness to accept such risks.
Unless otherwise noted, investment performance contained in these materials is reflective of a strategy composite. All other strategy data and information included in these materials reflects a representative portfolio which is an account in the composite that Western Asset believes most closely reflects the current portfolio management style of the strategy. Performance is not a consideration in the selection of the representative portfolio. The characteristics of the representative portfolio shown may differ from other accounts in the composite. Information regarding the representative portfolio and the other accounts in the composite are available upon request. Statements in these materials should not be considered investment advice. References, either general or specific, to securities and/or issuers in the materials are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendation to purchase or sell such securities. Employees and/or clients of Western Asset may have a position in the securities or issuers mentioned.
These materials are not intended to provide, and should not be relied on for, accounting, legal, tax, investment or other advice. The recipient should consult its own counsel, accountant, investment, tax, and any other advisers for this advice, including economic risks and merits, related to making an investment with Western Asset. The recipient is responsible for observing the applicable laws and regulations of their country of residence.
Founded in 1971, Western Asset Management Company is a global fixed-income investment manager with offices in Pasadena, New York, London, Singapore, Tokyo, Melbourne, São Paulo, Hong Kong, and Zürich. Western Asset is a wholly owned subsidiary of Franklin Resources, Inc. but operates autonomously. Western Asset is comprised of six legal entities across the globe, each with distinct regional registrations: Western Asset Management Company, LLC, a registered Investment Adviser with the Securities and Exchange Commission; Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorized and regulated by Comissão de Valores Mobiliários and Brazilian Central Bank; Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services License 303160; Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services License for fund management and regulated by the Monetary Authority of Singapore; Western Asset Management Company Ltd, a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan; and Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority ("FCA") (FRN 145930). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK as defined by the FCA. This communication may also be intended for certain EEA countries where Western Asset has been granted permission to do so. For the current list of the approved EEA countries please contact Western Asset at +44 (0)20 7422 3000.