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Durable Goods
Text Box: Interest rates are one of the earliest leading indicators for the entire economy. Because durable goods are higher-priced, longer-lasting items, consumers often take out loans or use lines of credit to buy them. Therefore, interest rates are a good leading indicator of consumer spending on durable goods. In the chart below we've inverted the year over year change in the Feds Fund rate because as rates go down it encourages spending. On average changes in the Fed Funds rate lead changes in the consumption of durable goods by 16 months. Current Comment - The year over year change in interest rates has been trending up (based on the inverted scale) since May 2006. The Fed appears to have changed its bias from raising rates to keep inflation in check to lowering rates to deal with any general economic affects of the credit crunch. However, the decreases in the Fed funds rate do not seem to be having their intended affect on durable goods consumer spending. The credit crunch/solvency crisis, rising consumer loans rate, and consumers' concerns about their debt levels are mostly likely the reasons for slower growth in durable goods consumer spending.
Text Box: While interest rates are a good indicator of durable goods consumption, they aren't the only leading indicator. If consumers don't have rising real wages they are unlikely to buy more durable goods, even with lowering rates. The chart below shows that small changes in real average hourly earnings is indeed a leading indicator of durable goos consumption. On average changes in real average hourly earnings lead changes in durable goods consumption by five months. Current Comment - Growth in real average hourly earnings is slowing down. It is unusual to have earnings slowing but the Fed funds rate dropping. Based on the above chart, the Fed's rate decreases seem to be having little impact on consumer spending. Therefore, incomes and consumer loan rates seem to be a better indicator at this time.
Text Box: The next chart shows a third leading indicator for real durable goods PCE - housing permits. More housing permits leads to more houses being built, which leads to more durable goods purchases as consumers buy appliances and electronics. There's even a correlation between new home sales and spending on cars. This chart shows that the historic correlation between housing permits and durable goods PCE is relativelty tight in both the time lag (about 7 months) and the magnitude of the changes (based on the scales chosen). However, in the early 1990s, while it is clear that durable goods consumption still lags housing permits, durable goods consumption stayed at a higher magnitude of growth. One could view this as over consumption by the consumer. Current Comment - The apparent over consumption by the consumer is still evident. Now that housing permits (and earnings as seen above) have contracted signficantly, it would seem likely that durable goods purchases by consumers would be in for a significant fall - especially in the light of the fact consumer spending has not contracted since 1992.
Text Box: Of course as consumers spend more or less on durable goods then manufacturers will adjust their production to the appropriate levels. While one might think that improved supply chain management would have shortened the gap between durable goods consumption and production this does not appear to be the case when looking at the chart below. Because the time between changes has been stable over time supply chain management perhaps has had a greater impact in shifting who holds inventory instead of shortening the time between changes in spending and production. On average changes in durable goods consumtpion lead changes in durable consumer goods industrial production by two months. Current Comment - Industrial production followed the overall downtrend in durable goods consumtpion from September 2002 to August 2006. Following the lead of durable goods spending, durable goods industrial production is now seeing accelerating growth. This is a very good sign for machine tool sales.
Text Box: For many years our Capital Spending Survey has shown the link between high capacity utilization rates and high spending on machine tools. But, the capacity utilization rates collected by the government are not the best measurement to use because someone must determine how much capacity in is in the marketplace. So, here we show that industrial production, which is a measure of the units produced, is a leading indicator of machine tool sales. Relatively small changes in industrial production lead to much larger swings in machine tool sales. On average changes in durable goods industrial production lead changes in machine tool sales by 18 months. Current Comment - Industrial production is now in an accelerating growth mode. Following the lead of industrial production, the rate of change in machine tool sales should continue to slow down through the middle of 2008 when they will bottom out and start trending up again.