Definition of Consumer Durables
Consumer durables cover products that take a long time to wear out and can service the consumer many times before running out of functional life. Typically, they include transportation vehicles, electrical appliances or passive items, such as furniture. The term contrasts with its counterpart, consumable goods, that designates a group of products that need to be replace frequently, such as fuel, textile, foods or cosmetics.
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Economic Indicator
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The U.S. Department of Commerce tracks and reports the amount of durable products shipped, inventoried or ordered as an indicator of economic growth. A high volume of manufactured durables indicates that consumers placed a large number of orders in the previous months. This also highlights the degree of confidence from the industry.
Volatility
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Investors experience high levels of volatility in durable goods and the monthly reports from the U.S. Department of Commerce deserve to be analyzed over several years to derive meaningful trends, as expressed by Ryan Barnes, investor adviser and expert in portfolio management and investment trading.
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Financial Modeling Challenge
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The expression "consumer durables" has become a standard terminology in financial analysis where it represents the category of goods that is not replaced by a consumer over a life span longer than three years. Durables depreciate during their life although financial models assume that the value remains the same while in use. This contradiction has introduced instability in computer financial models designed to predict the market growth and pricing changes. This issue has been investigated over the past 40 years. The Coase conjuncture of 1972 became a seminal paper that first tried to resolve this problem. This matter remains open today.
Trading Indicator
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Somewhat of a less frequent use of the terminology appears in micro-economic modeling, where durable goods are considered the outcome of the investment of capital funds into a tangible investment. This transaction may take two forms, a "putty-putty" transaction if the durable goods can be reversed into cash easily, such as investing and reselling the art of a known painter, or "putty-clay" when the transfer becomes irreversible as would the purchase of office equipment represent.
Value
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Durable goods are integrated in the list of the 10 elements that form the monthly U.S. Leading Index that provides an indication of where the economy is pointing. Despite the volatility of the durable goods index and some of the financial modeling challenges that they introduce, they remain an insightful examination tool of growth of various industry segments and an accurate measure of seasonal changes.
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References
- U.S. Department of Commerce: Bureau of Economic Analysis; Fixed Assets and Durable Consumer Goods in the United States 1925-99
- U.S. Department of Commerce: Advanced Report on Durable Manufacturers' Shipments; Inventories and Orders
- University of Chicago Booth School of Business: The Great Recession: Lessons from Microeconomic Data
- PIP Trade: Durable Goole Goods
- University of Illinois: Perishable Durable Goods
Resources
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