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With Strong Month, Durable Goods Orders Rose 4% Over May 2011


The trend of real durable goods orders tends to correlate well with stock prices with varying lead and lag times. The current trend of this index implies continued rangebound trading in stocks.

May Real Durable Goods Orders, adjusted for inflation and not seasonally manipulated, were up 4.1% over May 2011 (year-over-year). That compares with a 4% gain in Aprill year-over-year. In adjusting for inflation, this measure attempts to represents actual unit volume of orders. Also, the use of actual versus seasonally manipulated (or SA) data allows an accurate view of the trend to be seen.

With SA data, this may not be the case since SA data can overstate or understate the real underlying change by attempting to fit a standardized curve. There are no such issues when using the actual data.

Overall new orders volume remains well below the 2004 through 2007 levels, and the uptrend has slowed from the dramatic rebound of 2009-2010. However, 4% growth isn't bad.

May is usually an up month. This May was up by 5% from the April level (month-over-month, April to May 2012). That compares with a gain of 4.8% in May 2011 (April to May 2011). The average May change over the previous 10 years was a gain of 2.6%, so this year was not only better than last year, it was also significantly better than average. This year's gain was the strongest since 2006, which had a 5.3% increase.

On a three month basis, May is usually stronger than February. The average gain for May versus February over the previous 10 years was 4%. Last year, the gain was 7.4%. However, this year the May level was down 3.2% versus February. Is that a problem? On the chart, the trend looks stable, and so are the year-to-year gains -- so for now, it looks like just noise within a normal range.

The headline number was a 1.1% gain month to month SA. That beat the economists' consensus of 0.5%. As usual, they were looking at the wrong data. The real time withholding tax data showed the economy gaining ground. Economists were mostly convinced that it was slowing.

What does this mean for stocks? The trend of real durable goods orders tends to correlate well with stock prices with varying lead and lag times. The current trend of this index implies continued rangebound trading in stocks with, at best, a slight uptrend, unless and until the annual rate of change goes negative.

Editor's Note: Lee Adler is a financial markets analyst based in Florida. This article originally appeared on his website, The Wall Street Examiner.

Twitter: @Lee_Adler
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No positions in stocks mentioned.

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