Rising durable goods orders suggest the economy is in good shape

Orders for manufactured goods meant to last three years or more—also known as durable goods—rose by 0.2% in August. That number doesn’t seem like much, but it represents the kind of growth that drives the U.S. economy.

Durables include things like washing machines, stoves, refrigerators, industrial machinery, raw steel, and airplanes. When durable goods orders rise consistently, it means the economy is in pretty good shape.

The value of all durable goods purchased by consumers and businesses was $284.7 billion in August, according to the Commerce Department. That figure confounded economists’ expectations calling for $283.3 billion, which would have been a 0.5% drop from July.

Again, the difference doesn’t appear huge, but economic data is a game of inches. Every decimal counts. A billion and change certainly makes a difference for an economy that some experts say is heading toward recession.

On a year-over-year basis, the August gains were even more impressive as orders rose by 4.2% from the same time in 2022.

By far, the most impressive part of the August report was the 0.9% surge in non-defense capital goods orders excluding aircraft. This obscure category is considered an indicator of business spending plans—when it goes up, it means businesses are spending more, and this has knock-on effects on hiring.

While the durable goods report was positive, especially for manufacturing, it’s too early to take a victory lap.

How’s manufacturing doing? It depends on who you ask

As the Biden administration tries to spark a manufacturing renaissance with the Infrastructure Investment and Jobs Act and CHIPS and Science Act, early results suggest there’s a long way to go.

The most trusted gauge of manufacturing output tells us the sector has been in recession for all of 2023.

The ISM manufacturing purchasing managers’ index (PMI)—a monthly survey of manufacturers—has been shrinking for ten consecutive months. The August PMI came in at 47.6, on a scale of 1-100 where anything below 50 signals a declining sector.

The report showed that 62% of manufacturing GDP shrank in August, a considerable improvement from the 92% of the sector that shrank in July. Factory employment also rebounded from three-year lows but remained weak overall.

Consumer spending remains strong for now

Durable goods not only provide information about manufacturing, they also offer a glimpse into consumer spending habits.

As the Labor Department explains, “During times of economic uncertainty, consumers typically postpone purchasing durable goods, such as kitchen appliances, motor vehicles, sports equipment, and furniture.”

Demand for durables cratered at the start of Covid as lockdowns forced millions out of work. But as the stimulus checks came in and people returned to work, consumers increased their purchases of durable goods substantially.

“The pandemic may have lifted the demand for durable goods directly, by shifting consumer preferences away from services toward a variety of durable goods,” wrote Kristen Tauber and Willem Van Zandweghe of the Cleveland Fed. A massive stimulus from the federal government certainly didn’t hurt, either.

Consumer spending has continued to grow since the pandemic, but demand for durables has been less consistent. Over the past 12 months, durable sales have declined four times, including a massive 5.6% drop in July. That was the biggest monthly decline since the worst of the pandemic in 2020.

It’s nothing to worry about yet, but a sustained drop would suggest that consumers are putting off large purchases due to strained financial conditions.

The next few months are expected to be especially testy for Americans, as government shutdown fears, rising oil prices, and the return of student loan payments take their toll. While most Americans are scraping by, they’re taking out substantial loans in the process.

The consumer credit bubble ballooned again in July and now stands at a whopping $4.98 trillion. About one-fourth of that is the most dangerous kind—revolving credit, which includes credit cards and personal lines of credit.

Because they’re usually larger and more expensive, durable goods are often purchased using credit. Whether that's a good or bad thing depends on the health of the consumer moving forward.