Monday, June 27, 2022

Durable Goods Orders – Consumer Demand Destruction Imminent

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 Today’s release of the Durable Goods Manufacturers’ Shipments, Inventories and Orders Report (M3) showed that new orders for manufactured durable goods increased in May by $1.9 billion (adjusted for seasonality, but not for inflation) or 0.7 percent to $267.2 billion while new orders for durable consumer goods declined by 0.62% to $42.9 billion.

The relationship between consumer sentiment and manufacturers’ new orders for consumer durable goods is pretty obvious as a pullback in consumer sentiment generally precedes the destruction of demand for consumer durable goods.

Given the historic pullback in the University of Michigan’s Consumer Sentiment Survey, it appears clear that we are about to see a significant pullback in consumer durable goods spending.

While this is the precise demand destruction that the Fed is looking to achieve with their new “inflation fighting” interest rate policy, to date, the decline in consumer sentiment consumer durable goods spending is likely primarily coming as the result of higher consumer spending on non-durable goods as rising prices for food and energy are forcing consumers to make hard spending choices. 

The following data visualization (click for dynamic version) shows New Orders for Consumer Durable Goods (in blue) on the left axis and the University of Michigan Consumer Sentiment (in red) on the right.

Notice the significant gap that needs to close in order for the current level of new orders for consumer durable goods to match the current level of consumer sentiment.  

Obviously, we should look for a significant decline in new orders for consumer durable goods in the months ahead.