South-Western College Publishing - Economics  
Durable Goods Trend is Up
Topic Aggregate Demand / Aggregate Supply
Key Words Durable Goods, Core Durable Goods, and Aggregate Demand
Full Article

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Reference ID: A162598925

News Story The housing market continued to drag along in March, but the greater than expected level of durable goods orders by business is picking up the slack and helping to keep the economy on track for moderate economic growth.

Previous statistics related to business spending had indicated that investment was about to falter until the March figures turned that expectation around. Business firms placed more orders for investment type goods in March than in February. Heavy-duty items like machinery and electrical equipment were among the items businesses were ordering.

National income statisticians keep data on three different categories of spending. They are nondurable goods, durable goods, and services. Durable goods are goods with a life expectancy of three years or more. When businesses spend on durable goods like they have recently it is an indication that they have a good outlook for future sales and economic activity. Durable goods orders rose 3.4 percent in March for a total of $214.9 billion, a figure that was larger than expected.

An even more favorable report came from the closely watched core capital goods component of durable goods spending. This measure of spending keeps track of durable goods spending without including military goods and aircraft. Most economists view this measure as a better yardstick for corporate investment spending plans. The core rate rose 4.7 percent in March after falling 6.2 percent in January and 2.3 percent in February.

“The rebound in core capital goods orders is an extremely welcome development,” said Brian Bethune, an economist with Global Insight, a research firm, wrote in a report. The gain, he added, “should alleviate fears that business investment was on the cusp of spiraling downwards.”

The strong showing of durable goods spending by the business sector will translate into strong aggregate demand and continued economic growth.

Discussion Questions:
1. Use any source available to define the three types of spending identified in the article.
2. Why is the core capital goods measure of durable goods spending preferred by many economists?
Multiple Choice/True False Questions:
1. Durable goods are goods with an expected life of:

  1. Three years or less.
  2. Three years or more.
  3. Five years of less.
  4. Five years or more.
2. The core capital goods measure of durable goods spending excludes:

  1. Military and consumer spending.
  2. Electrical Equipment
  3. Machinery
  4. Military and aircraft spending
Source Jeremy Peters, “Durable-Goods Picture Shows Surprising Strength”, The New York Times Online, April 26, 2007. .
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