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By New_Deal_democrat March 5, 2015 11:01 am
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Durable goods purchases as a useful long leading indicator

I have been searching for mid-cycle indicators, that is, economic data which tends to peak at about the middle of an economic expansion.

One general area which has looked promising is capital and durable goods expenditures. While I haven't found any Holy Grail, personal consumption expenditures on durable goods looks like a useful long leading to coincident indicator depending on how it is measured.

The first useful measurement is to compare purchases of durable goods YoY (blue) with purchases of nondurable goods YoY (red), first for 1960 to the 1980s::

and from the 1980s to the present:

The above graph shows quarterly averages to cut down on noise.  Here's the takeaway:

1. No recession has ever occurred with positive YoY durable goods purchases, where durable goods purchases have grown YoY more than nondurable purchases (i.e., the blue line is above the red line).

2. In the quarter in which a recession started, durable goods purchases have always be +2% YoY or less. 

3. The two negative quarters outside of recessions (1966, 2002) coincided with near-recessions with very weak growth.

4. Sustained periods of nondurable purchases higher than durable purchases, after the peak quarter in durable purchases have only happened in the second half of expansions. (this is very weak finding, although worth noting).

Needless to say, this view indicates the expansion is presently intact.

The second useful measurement is inflation-adjusted purchases of durable goods (blue in the graph below).  I am also showing gross fixed capital formation (green) for comparison purposes. Here is 1959 to the early 1980s;

and here is the early 1980s to the present:

Beginning with the 1960s, inflation adjusted purchases of durable goods have always turned down from their highs at least one year before the next recession, with the sole exception of the 1981 double-dip, and even there they did turn down a quarter before the second recession. Gross fixed capital formation has followed a similar pattern, but has frequently turned slightly later.

Needless to say, as of the end of 2014, both were increasing substantially, giving us a green light for now. While inflation-adjusted durable goods purchases are not a mid-cycle indicator, they are a useful addition to the toolbox as a long leading indicator.

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