South-Western College Publishing - Economics  
Durable Goods Sales Show Decline
Subject Durable Goods
Topic National Income Accounts
Key Words

Durable Goods, Postponability, and Economic Recovery

News Story

Orders for durable goods, which include items that range from washing machines to civilian aircraft, fell 7.4 percent in August. This decline followed a July gain of 9.3 percent. A large part of the August decrease came in the category of civilian aircraft, which fell by 42.8 percent. If civilian aircraft were taken out of the calculation, a fall of 0.5 percent in the non-defense capital spending category remains.

This category includes goods expected to last three years or more. The fact that such goods are durable makes their purchase postponable--a characteristic that causes much concern during a period of economic recovery. Economists use this category of non-defense capital goods spending as a measure of business spending: the most volatile component of total spending in the economy.

As confidence in the economy worsens, consumers begin to repair their washing machines, autos, and other big-ticket (durable) items instead of buying new ones. This behavior results in lower levels of consumer spending and a fall in aggregate demand in the economy. As a result of decreasing demand, jobs may be lost as firms adjust to the lower demand for their goods.

Some good news still exists for the economy. Orders for computers and other electronic products increased 4.1 percent in August after falling 4.3 percent in July. The employment picture is showing signs of stabilizing, and output has increased as worker productivity remains high. The Fed has also shown confidence in the recovery by ending a record stretch of low interest rates. Considering the report as a whole, the American economy may continue its path to recovery, but the report indicates that the business sector remains cautious about the third quarter of 2004. With both businesses and consumers showing caution in spending, the economy is becoming a key issue in the country's upcoming November presidential election.

(Updated November, 2004)

Questions
1.

How do you define a durable good? Can you give an example of a durable good that you own and which you may have considered replacing?

2. Explain why economists worry about declines in durable goods orders.
3. Make a list of at least 5 items that you use in your everyday life that you consider to be a postponable purchase.
Source Reuters, "Durable Goods Orders Dip in August", CNNMoney.com, September 24, 2004.

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