Durables Goods Orders: A Leading Indicator for Stock Prices?
Interesting chart from Mike Panzner regarding durable goods and the SPX. Note that Real spending on nondurable goods was flat in August.
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Before getting overly excited about this, I would want more info on three distinct questions:
1) Does the correlation go back beyond 1998? Is this merely a recent phenomena, or does it have a deep and broad history?
2) A fall off in Durable Goods would make sense as an indicator of both concurrent and future economic slowing, profit cooling, and equity price retracement. However, is this merely a decade of coincidental correlation, or is there a true causative factor at work?
3) There seems to be a year lag from September 2001 to 2002, from when Durable Goods orders picked up to when the market started moving higher. Is this historically typical? Has the same lag occurred in the past with Durable Goods falling (as they have since September 2006)?
It does seem to be an intriguing parallel . . .
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UPDATE October 2, 2007, 5:52am
Several emailers and commenters have directed me to the Dallas Fed's collection of charts, especially this one:
Here's another view: The long term relationship between Durable Goods ex-Transportation and the broader stock market has been ambiguous.
Monday, October 01, 2007 | 02:00 PM | Permalink
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Hello Mr. Ritholtz,
Very good questions regarding the figure. I am running into charts like this more frequently and often wonder the same things. How is it possible to compare the current state of affairs with the top of a market bubble that this country hasn't seen since the 1920's? Are we likely to see such a severe bear market in the near future? Probably not, but I guess it depends on who you ask.
Paul
Posted by: Paul Stiles | Oct 1, 2007 2:20:31 PM
I can tell you this from an economic point of view. Recessions essentially cannot occur without a substantial drop off in durable goods.
Nearly all of the fluctuation in potential GDP since WWII came from housing and durables goods. Of the two only durable goods tends to produce enough job loss to initiate a full blown recession.
The trend has been housing sparks the recession durable goods sees it through. If durables hold up then you can pretty much take it to the bank that there will be no recession.
To my knowledge there has never been a false negative on durables. Its FRED code PCPG if you want to check it out.
Posted by: karl smith | Oct 1, 2007 2:35:30 PM
Barry,
It's almost always important to have comparisons to the market over several DECADES to determine if there is a chance at being meaningful. Every economic and market cycle is different to some degree, so reviewing a correlation for only ten years is just a short term look that may have no value, as you suggest.
Posted by: John | Oct 1, 2007 2:38:02 PM
Durable goods are still essentially in positive territory, so the parallel is not there. Perhaps the rise in SPX will be slower, but untill the durables show sustained negatives, I would not put much into it.
Posted by: Eddie | Oct 1, 2007 2:41:23 PM
Oh, geez. Run some time series of whitegoods sales (I know that whitegoods are only a subset of durable goods, of course) versus the housing market and you'll see that the chart in Barry's post is a little pointless. You're more or less charting an intermediate indicator, here.
Posted by: Bob Dobalina | Oct 1, 2007 2:44:10 PM
Agree with Bob...while it is interesting to see this (possible) relationship over these ~10 years, what does it look like on a longer time frame?
The same can be said looking a the US Dollar chart. From '99 through today it looks like a total collapse, but if you step back from the trees, we see a return to prior trading levels. Data mining is a tool for fools. It's ok if the user states that this study, looks at a limited period of time, and MIGHT be creating a correlation, but...
Posted by: Fred | Oct 1, 2007 2:56:21 PM
So how about a "gut check" then, if the tools for fools are to be cast aside? I'm both a bull and bear, but honestly, something feels slimy about today's action to the upside. Kind of like the overspray I noticed on the grass while looking at a house for sale 2 years ago. Or am I missing somthing today???
Posted by: dukeb | Oct 1, 2007 3:02:26 PM
Barry,
Word To The Wise...
It is:
One "phenomenon" ("on" at the end)
Several "phenomena" (a" at the end)
Posted by: Richard | Oct 1, 2007 3:07:31 PM
PCDG - sorry
Posted by: karl smith | Oct 1, 2007 3:11:56 PM
chart after chart and data after data shows things are bad but yet the market keeps going up
Posted by: Costa | Oct 1, 2007 3:12:36 PM
"...am I missing somthing today???"
Pervasive negativity/fear have kept many out of stocks (or short)...the bear's case "makes so much sense". Banks and financials are showing that the black hole (boogie man) is not the killer many expected. The recession/bear market argument has been a very crowded position.
Posted by: Fred | Oct 1, 2007 3:26:30 PM
The 'Wall of Worry'. :D
Posted by: Eddie | Oct 1, 2007 3:28:33 PM
Gee isn't the stock market phe·nom·e·nal !
Pronunciation: fi-'nä-m&-n&l
relating to or being a phenomenon as
a) known through the senses rather than through thought or intuition
b) concerned with phenomena rather than with hypotheses
c) EXTRAORDINARY, REMARKABLE
Posted by: km4 | Oct 1, 2007 3:35:17 PM
"The recession/bear market argument has been a very crowded position."
But so has the bull argument, no? In fact, maybe that's what's bothering me....the ups and downs feel like arguments being made (won and lost and won and lost) rather than honest ups and downs. Don't get me wrong; I love volitality and remember being bored out of my skull a few decades ago when everything seemed to go flat for a while. But my gut feel has turned me into a strict day trader for the past month and that's for the first time ever. I don't want to own anything overnight--bull or bear postions.
Posted by: dukeb | Oct 1, 2007 3:38:10 PM
karl smith,
Note that the chart you reference is for consumption, not orders.
In that vein, it's interesting that although orders have turned down, unfilled orders are at their highest absolute level since first stated on a NAICS basis, and the highest relative to shipments since 93 or so. Unfilled orders to shipments fell sharply in the early-mid 90's expansion, fell less sharply from the mid90's to 2000 bubble, rose through the 2001/02 recession, fell through the 2003/05 expansion, and have been climbing sharply since mid05.
A quick look at roughly equivalent SIC data for 1960-1991 seems similar. Ratio peaks in slowdowns.
This seems counterintuitive. You'd think that unfilled orders would drop off during recessions and grow during expansions.
OTOH, maybe what this is hinting at is that as expansions mature, capital investment gets stranded in now saturated businesses while the "next big thing" goes begging for a while until a recession brings about a restructuring. IF that's the case, we're ripe for such a restructuring.
Posted by: Estragon | Oct 1, 2007 3:50:58 PM
"Banks and financials are showing that the black hole (boogie man) is not the killer many expected. The recession/bear market argument has been a very crowded position."
With huge housing inventory still going up and the bulk of the ARM resets not until the beginning of 2008, the banks and financials (and the US economy) still have a long way to go. Further, there will be a lag between the time that most of the ARMs reset and homeowners actually default and go into foreclosure. And with housing construction already plummetting, commercial won't be far behind. That said I remain fairly positive on larger cap, higher quality companies' stocks particularly on a relative basis now that the private equity put has been pulled out from under the small/mid caps.
Posted by: skateman | Oct 1, 2007 3:51:56 PM
according to yahoo...markets are up in anticipation of another rate cut, and i think the belief is mark-to-models are now getting marked-to-market.
http://biz.yahoo.com/ap/071001/wall_street.html?.v=36
Posted by: techy2468 | Oct 1, 2007 3:55:14 PM
Estra...what might "just in time" inventory mean in light of your analysis? Productivity enhancements in order flow have to be considered.
Posted by: Fred | Oct 1, 2007 3:57:12 PM
Fred - "Banks and financials are showing that the black hole (boogie man) is not the killer many expected"
Hmmm... maybe you have that backwards. Banks and financials may be saying the black hole is unexpected. There's no way that little wiggle in the summer had a financial black hole priced in.
Posted by: Estragon | Oct 1, 2007 3:58:58 PM
Fred,
I dunno. Why would unfilled orders be running up now? I have to assume that capacity isn't in place to fill the orders, and the types of production are shifting to long cycle (eg. power stations) from short (eg. washing machines).
In the current environment I'd say we need to see some realtors and mortgage brokers get busy building some just in time inventory of whatever the unfilled orders are for ;-)
Posted by: Estragon | Oct 1, 2007 4:04:54 PM
"that little wiggle in the summer"
That's a GOOD ONE...lol
...a 20% "wiggle".... The underperformance from the banks over these issues have been baked in "at the DNA level. These stocks have been TOXIC! Grave dancers were scoffed at on these pages when they bought.
Posted by: Fred | Oct 1, 2007 4:08:37 PM
"Why would unfilled orders be running up now?"
Agree on the cycle points. We might also be looking at shortages of components in the goods ordered....pent up demand. Interesting points though.
Posted by: Fred | Oct 1, 2007 4:12:07 PM
Like housing, durable goods are often bought with borrowed money. One would logically expect them to be systematically affected by real interest rates.
Aren't they, or their subset non-defense capital goods orders, included as one of the leading indicators?
Posted by: algernon | Oct 1, 2007 4:14:00 PM
Fred,
Take a look at a long term log scaled BKX chart. This summer wasn't a barnburner in relative terms. 1998, for example, was about twice as bad, and that was mostly about Asian currencies, a Russian default, and a blown up hedge fund. If markets seriously discounted a meltdown in US and European banking, the carnage would be far worse.
Posted by: Estragon | Oct 1, 2007 4:22:08 PM
I dont't know--last year we were looking at the housing chart vs spx as a leading indicator and that has not panned out yet. I guess a few hundred trillion of derivatives, growing margin accounts, increased money supply and lower rates gives the equity and bond markets a handicap.
Posted by: hal | Oct 1, 2007 4:59:27 PM
