Core Durable Goods Orders

• The Bottom Line: This is a crucial economic “weather report” that gauges business confidence and future manufacturing activity by tracking big-ticket orders, giving you a sneak peek into the health of the industrial economy.
• Key Takeaways:
• What it is: A monthly report on new orders received by U.S. manufacturers for long-lasting goods (products expected to last three years or more), specifically excluding the highly volatile transportation sector (like aircraft and cars).
• Why it matters: As a forward-looking indicator, it signals whether businesses are optimistic enough to invest in new equipment and expansion, which often precedes broader economic growth or contraction. It helps a value investor understand the current business_cycle.
• How to use it: Use it not as a direct buy or sell signal for a stock, but as essential context to assess the risks and opportunities for companies, especially those in cyclical industries.

Imagine you own a popular neighborhood coffee shop. To understand how your business is really doing, you track your daily sales. Now, one month, you get a massive, one-time catering order for a big wedding. That single order makes your monthly sales numbers look spectacular, but it doesn't reflect the true, underlying health of your day-to-day business. The wedding order is a noisy, unpredictable event. Your real strength comes from the steady, consistent stream of customers buying lattes and croissants every morning. In the world of economics, “Durable Goods Orders” are like your coffee shop's total sales, including that giant wedding order. “Durable goods” are simply products built to last, typically for three years or more. Think of things like washing machines, computers, industrial machinery, and—critically—airplanes and cars. The problem is that the transportation sector is like that wedding order. A single, multi-billion dollar order from an airline for a fleet of new Boeing jets can dramatically skew the entire month's data, making it look like the economy is booming when, in reality, other sectors might be struggling. This is where Core Durable Goods Orders comes in. It is the more insightful, “filtered” version of the report. It tracks all the same long-lasting goods but deliberately excludes the volatile transportation sector. By removing the “noise” of huge, lumpy aircraft and auto orders, it gives economists and investors a much clearer, more stable signal of the underlying trend in business investment. It’s like looking at just your daily latte and croissant sales—it tells you the real story of your business's health. When businesses feel confident about the future, they invest in new machinery, upgrade their computer systems, and expand their factories. These are the “core” durable goods. A rising trend in these orders suggests that company executives are opening their wallets, which is a powerful vote of confidence in the economy.

“If you spend more than 13 minutes analyzing economic and market forecasts, you've wasted 10 minutes.” - Peter Lynch

A true value_investor is a “bottom-up” analyst. We focus on the specifics of an individual business—its competitive advantages (economic_moat), the quality of its management, the strength of its balance_sheet, and, most importantly, its intrinsic_value compared to its market price. We generally avoid trying to predict the direction of the overall economy or the stock market. Peter Lynch's quote above perfectly captures this sentiment. So, why should we care about a broad economic indicator like Core Durable Goods Orders? The answer is: Context. Think of it this way: a value investor is like a ship's captain focused on the sturdiness of their own vessel. They know its engine, its hull, and its crew inside and out. But even the best captain needs to look at the weather forecast. The Core Durable Goods report is that weather forecast for the industrial economy. It doesn't tell the captain how to steer their ship, but it warns them if a hurricane is forming on the horizon or if calm seas are ahead. Here's how this “weather report” is valuable:

• Understanding the Business Cycle: This report is one of the best real-time indicators of where we are in the business_cycle. A series of strong, positive reports suggests the economy is in an expansionary phase. A series of weak, negative reports can be an early warning of a potential recession. This knowledge helps you understand the environment in which your portfolio companies are operating.
• Assessing Cyclical Stocks: The report's insights are most critical when analyzing cyclical stocks—companies in industries like manufacturing, machinery, and technology hardware. The fortunes of these companies are directly tied to the spending habits of other businesses. If core orders are falling, it means the customers of a company like Caterpillar or Intel are cutting back, which will inevitably impact their future earnings.
• Informing Your Margin of Safety: The principle of margin_of_safety is the bedrock of value investing. It means buying a security for significantly less than your estimate of its intrinsic value. The economic weather forecast provided by Core Durable Goods can help you determine how large your margin of safety needs to be. If the report signals a coming economic storm, you should demand a much wider margin of safety before buying a cyclical company, as its near-term earnings are far more uncertain. For a non-cyclical company, like a toothpaste maker, the report has far less bearing.
• Avoiding Value Traps: A stock might look cheap based on its past earnings. But if it's in an industry that's highly sensitive to capital spending, and the Core Durable Goods report is signaling a sharp downturn, those past earnings are a poor guide to the future. The “cheap” stock could get much cheaper. The report provides a forward-looking reality check.

In short, a value investor doesn't use this data to time the market. They use it to better understand the risks embedded in a specific business and to make more rational, informed decisions about the price they are willing to pay for it.

As an individual investor, you won't be calculating this yourself. The data is compiled and released monthly by the U.S. Census Bureau. Your job is to know where to find it and how to interpret it intelligently.

The report provides several key pieces of information, but value investors should focus on the month-over-month percentage change. This is the headline number that news outlets report. However, looking at a single month is a classic amateur mistake. The data can be noisy and is often subject to revisions. A professional approach involves looking for three things: 1. The Trend: Is the percentage change positive or negative over the last three, six, or twelve months? A single month's drop might be a blip; a six-month decline is a clear and worrying trend. 2. Revisions: Always check if the previous month's data was revised. A report might look good on the surface (e.g., +0.5%), but if the prior month was revised down from +0.8% to +0.1%, the overall picture is much weaker. 3. The Magnitude: A change of +/- 0.2% is not particularly meaningful. A change of +/- 2.0% is a very strong signal that deserves your attention.

Interpreting the data requires layering it on top of your existing knowledge of a company.

The key is to never view the number in a vacuum. Compare it against other major indicators like gross_domestic_product (GDP), inflation data (like the CPI and PPI), and unemployment figures to build a more complete mosaic of the economic landscape.

Let's compare two hypothetical companies in the face of a negative economic signal.

• Company A: Industrial Robotics Inc. (IRI) - A leading manufacturer of automated assembly line robots. Its customers are large manufacturing companies across the auto, electronics, and aerospace sectors.
• Company B: Dependable Diapers Co. (DDC) - A dominant consumer brand that sells diapers, baby wipes, and other essential childcare products.

The Scenario: The U.S. Census Bureau releases its latest report. Core Durable Goods Orders have fallen by 1.5% for the third consecutive month, indicating a clear and accelerating slowdown in business investment. The Value Investor's Analysis:

• For Industrial Robotics Inc. (IRI): This news is a direct and severe red flag. IRI's entire business model depends on other companies being willing and able to make large capital expenditures. The falling orders report is a strong signal that IRI's potential customers are slamming the brakes on spending.
  • Actionable Insight: An investor looking at IRI should immediately become more skeptical. They must question the company's future revenue projections. They should dig into the company's order backlog (how many confirmed orders are already in the pipeline?) and the financial health of its key customers. The required margin_of_safety to purchase IRI stock has just increased dramatically. What looked like a fair price yesterday might be a dangerously high price today.
• For Dependable Diapers Co. (DDC): The report is largely irrelevant. The demand for diapers is driven by demographics (the birth rate), not the corporate investment cycle. Babies need diapers whether the economy is booming or in a recession. Businesses aren't buying industrial robots, but households are still buying essential consumer goods.
  • Actionable Insight: The investor in DDC can largely ignore this specific report. Their analysis should remain focused on factors relevant to DDC's business: the price of raw materials (pulp, plastics), competition from store brands, the company's brand loyalty, and its international growth prospects. The economic storm hitting the industrial sector is unlikely to reach DDC's shores.

This example highlights the core lesson: Core Durable Goods Orders is a powerful tool for risk assessment, but its relevance is highly dependent on the specific business you are analyzing.

• Forward-Looking: Unlike GDP, which tells you what happened in the past, new orders tell you what is likely to happen in the future. It's a peek at the production pipeline for the coming months.
• A Clearer Signal: By stripping out the wildly erratic transportation sector, the “core” report provides a much more stable and reliable indicator of underlying business investment trends than the headline durable goods number.
• Excellent Gauge of Business Confidence: This isn't a survey of what executives say they will do; it's a measure of what they are actually doing with their company's capital. It's a tangible vote of confidence (or no confidence) in the economy.

• The Macro-Forecasting Trap: The single biggest pitfall is believing this report can help you predict the stock market. It can't. A value investor's job is to buy good businesses at fair prices, not to guess the economy's next move. Use this data for context, not for prophecy.
• Orders Can Be Canceled: The report measures new orders, not final sales. During a sharp downturn, companies can and do cancel previous orders, meaning the report can sometimes overstate future economic strength. ¹⁾
• Subject to Large Revisions: The initial data release is just an estimate. The figures are often revised in the following one or two months, sometimes significantly. It's wise to wait for the revised numbers before drawing any strong conclusions.
• Limited Scope: The report only covers goods, not the massive and ever-growing services sector of the economy (e.g., software, healthcare, consulting). It provides a picture of the industrial economy, not the whole economy.

• business_cycle
• margin_of_safety
• intrinsic_value
• cyclical_stock
• gross_domestic_product
• inflation
• economic_moat