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Durable Goods and What They Say About the Economy | WSJ - YouTube
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- [Narrator] The US manufacturing sector,
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continued it's rebound in July.
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Here's the way to see that,
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a chart showing new orders
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for goods that typically last three years
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or longer.
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After declining sharply,
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following coronavirus lock downs,
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new orders rose to about
$230.7 billion in July.
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But still remain below
pre pandemic levels.
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Counting new orders
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for long lasting goods can reveal
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whether manufacturing
activity is expanding
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or contracting.
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That can point toward changes
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in the economy's recovery.
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- That gives you a sense
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of where things are headed.
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So it counts orders
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that in a lot of cases,
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that retailers make to manufacturers.
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So if you're a retailer,
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a major retailer,
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and you're ordering a bunch of products,
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say a bunch of dishwashers,
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that's because you're pretty
confident you're going
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to be able to sell them pretty soon.
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- [Narrator] The first thing
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to know about the durable
goods indicator is
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what it measures.
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The number begins with a survey
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of about 3,100 manufacturing companies
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across 92 categories in the United States.
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The businesses report on
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how many new orders they filled
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to produce longer lasting durable goods.
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There are two types of goods.
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Non durables are consumed
quickly like paper,
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food or gasoline.
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And then there are durables,
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that count includes construction
materials like lumber.
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It also includes firearms,
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office chairs,
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tape measures and computer hard drives.
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It includes DSLR cameras and VR headsets,
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medical equipment,
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like electrocardiography machines,
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or gurneys are durable goods too,
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as our pieces of fine jewelry and books.
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It also includes items
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that are really expensive and
aren't purchased that often.
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Products like heavy machinery.
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For example,
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these conveyor belts are durable goods.
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Economists track the increase or decrease
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in the new orders on a
month to month basis.
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If more new orders come
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in this month than the last,
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that could point toward
an economic expansion.
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That's because one new durable goods order
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can signal future activity.
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To see that in action,
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here's an example,
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a farm might need to purchase a tractor.
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So, it places an order.
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The tractor manufacturing company,
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then places orders with a
number of other companies
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who produce parts like engines,
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windshields and lights.
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Each of those suppliers
sends orders to manufacturers
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for raw materials and other durable goods.
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The indicator can also capture
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the ripple effects from
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a bigger national trend
like housing sales.
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- Suppose say home sales
are doing really well,
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like it turns out they are right now.
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It's conceivable,
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it's possible that a bunch
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of people are gonna start
buying long lasting appliances
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for their homes.
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And that in turn will cause
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the retailers of these
long lasting appliances to,
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to order more from manufacturers.
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- [Narrator] The durable
good survey captures
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the manufacturing activity
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that's connected to business activity.
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In this case,
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the purchase of a home.
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Many manufacturers track these new orders
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and send the data to the Census Bureau.
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Most of the manufacturers
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in the survey have $500 million
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or more in annual shipments.
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But it also includes some smaller firms
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to make the sample more representative.
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Economists, investors and analysts watch
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for changes in the numbers,
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which are released monthly.
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- Our main use really,
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is it feeds into the GDP reports which is
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this very obviously very
closely watched indicator.
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- [Narrator] Durable goods
can provide early insight
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into economic patterns,
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but the indicator is not without flaws.
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Of the many items that
are counted in the survey,
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some are outweighed and can
obscure changes elsewhere
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in manufacturing.
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- One thing to keep
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in mind about the durable goods report is
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that it's very volatile.
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And the source of the
volatility are things like,
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like aircraft.
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- [Narrator] To see a better
proxy for business investments,
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you can look at the
non-defense capital goods,
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excluding aircraft.
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It's a subsection of the
durable goods survey.
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- That gives you a better sense
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of kind of,
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of the trend,
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which is really what
we're looking for here.
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- [Narrator] Excluding aircraft makes
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a significant difference in the data.
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For example,
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in some cases,
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a new Boeing jet liner can cost
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between 50 million to over $200 million.
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And its supply chain stretches
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to over 12,000 companies.
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But production
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of new Boeing planes has stalled following
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two fatal seven 37 MAX crashes
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and a pandemic driven
collapse in air travel.
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500 jet orders were canceled
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this year alone and new orders have slowed
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to a trickle.
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Boeing's troubles have overshadowed
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other manufacturing activity which skewed
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the durable goods survey results.
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- [David] It made
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the durable goods number look very strange
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because you had all
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these aircraft orders
they weren't coming in.
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So, you know,
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a few major categories
like that can really skew
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the results.
- Public spending
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on defense can do the same.
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- Things that the military
buys are also included
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in this report.
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So if the Pentagon puts in an order for
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a bunch of fighter jets
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or a bunch of tacks or
something like that,
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you know that shows up in the report.
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It's hugely expensive
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and it will really sort
of bump up the numbers
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for that month.
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But it doesn't really tell you
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a whole lot about the overall state
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of the economy,
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it's just the Pentagon has made
a bunch of orders for tacks.
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- [Narrator] The durable
goods survey captures ripples
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of economic activity across manufacturing.
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But economists look beyond
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the headline number for
a more meaningful view
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of where things are headed.
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(bright upbeat music)
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