South-Westerns' Economic News Summaries
August Shows Strong U.S. Durable Goods Sales
Topic National Income Accounting
Key Words

Durable Goods and Recession

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Reference ID: A136803139
News Story

National income accountants measure personal consumption expenditures by adding up the amounts spent on durable goods, nondurable goods, and services. Durable goods are expected to work at least 3 years or more. Examples include automobiles, personal computers, and refrigerators. Spending on such goods makes up about 12 percent of total consumer expenditures.

The most recent statistics from the Commerce Department show that orders for durable goods rose about 3.3 percent in August, after falling by 5.3 percent in July. Durable goods orders are a measure of the dollar volume of items ordered from manufacturers, and are believed to be an important indicator of economic activity in the manufacturing sector. When durable goods orders increase, firms likely increase production and hiring.

The August report indicated that the manufacturing sector is picking up its pace after a sharp decline in July. “At least in August, the manufacturing sector was doing O.K., “ said Citigroup economist Brian Jones, who also indicated that analysts were sort of “groping around for a while” as they waited for the impact of the hurricanes to become clear.

In a separate statement, the president’s top economic adviser Ben S. Bernanke said the hurricanes would only temporarily dent the economy. “I don’t see any significant risk of a recession,” he said. “I think consumer spending is going to remain strong; underlying momentum is good; income and job creation is good; and, of course, the rebuilding itself is going to create jobs and activity.” This positive statement by Bernanke and the good durable goods report both indicate that the economy is in pretty good shape. Many analysts, however, are reluctant to give any definitive answer to the impact of the durable goods report. On one front, the full extent of the impact of the hurricanes is not yet known. Secondly, durable goods orders are know to be extremely volatile and subject to large revisions when the complete information becomes available.

Questions
1.

Discuss the difference between durable goods and nondurable goods. Using any source available to you, find out what portion of GDP nondurable goods contribute to overall GDP. Likewise for services.

2. Why are economic analysts interested in the report on durable goods orders?
3. Why have analysts been “groping around for a while” with respect to their economic predictions?
Source Vikas Bajaj, “Orders for Durable Goods Recovered Strongly in August”, The New York Times Online, September 29, 2005
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