Durable Goods Post Largest Drop in Nearly a Year

The report on Monday added to other data for July on industrial production, housing starts and new home sales that have suggested economic growth this quarter will probably not accelerate as much as economists had hoped.

"So far, things aren't looking that great," said Millan Mulraine, senior macro strategist at TD Securities in New York. "We are expecting a bounce in growth, it can still come, but it may not necessarily be in the first month of the quarter."

The Commerce Department said durable goods orders dropped 7.3 percent as demand for items ranging from aircraft to computers and defense equipment fell.

It was the biggest decline since last August and snapped three consecutive months of gains.

Orders for durable goods - items from toasters to aircraft that are meant to last three years or more - had increased 3.9 percent in June. Economists had expected orders to fall 4.0 percent last month.

Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, fell 3.3 percent, breaking four straight months of gains. It was the biggest drop since February.

Orders for these so-called core capital goods increased 1.3 percent in June. Economists had expected this category to rise 0.5 percent in July.

The decline in demand suggested the manufacturing sector, which hit a speed bump early in the year, will probably not bounce back as quickly as many economists had anticipated.

The report was at odds with a survey from the Institute for Supply Management released earlier this month that showed new orders at their highest level in more than two years in July.

Still, it was the latest sign that economic growth might not accelerate much from the second quarter's 1.7 percent annual pace. Industrial output was flat in July, while residential construction increased less than expected and new home sales tumbled last month.

SHIPMENTS FALL

Troublingly, the durable goods report showed that shipments of core capital goods, which are used to calculate equipment and software spending in the government's measure of gross domestic product, fell 1.5 percent in July.

Shipments had dropped 0.8 percent in June. While shipments tend to decline in July because not all components in this category are seasonally adjusted, economists noted the drop last month was the largest since 2008.

Forecasting firm Macroeconomic Advisers lowered its third-quarter GDP growth estimate by two tenths of a percentage point to a 1.8 percent rate. Barclays cut its GDP growth forecast to a 1.9 percent rate from 2.1 percent.

Economists said while the drop in core capital goods orders could attract the attention of some Federal Reserve officials, it was unlikely the U.S. central bank would step away from a plan to start reducing its monthly bond purchases before the end of the year.

Some blamed the weak July data on a recent spike in interest rates in anticipation of a reduction in the Fed's bond buying, which many think will come at its next meeting on September 17-18.

"When looking for signs that interest rate increases are too much for the economy to handle, durable goods, like housing, are a leading indicator of weakness in the broader economy," said Chris Low, chief economist at FTN Financial in New York.

"We expect the Fed is determined to start reducing the size of asset purchases regardless, in part because the market has already begun to reverse some of the recent rate pressure without the Fed's help."

U.S. Treasury debt prices rose on the data, pushing yields lower, while the dollar fell against the yen. U.S. stocks were up marginally.

Durable goods orders in July were held down by a 19.4 percent plunge in bookings for transportation equipment. That reflected a 52.3 percent drop in orders for civilian aircraft.

Boeing received orders for 90 aircraft in July, down from 287 aircraft the prior month, according to information posted on its website. Orders for motor vehicles gained 0.5 percent after rising 0.2 percent the prior month.

Even excluding transportation, demand for long-lasting manufactured goods was weak almost across the board.

There were declines in orders for computers and electronic products, and demand for electrical equipment, appliances and components also fell. Orders for machinery and primary metals were flat.

Orders for defense capital goods plummeted 21.7 percent in July after hefty gains in the prior months.

(Reporting By Lucia Mutikani; Editing by Andrea Ricci)

Sharp Fall for Orders of Durable Goods

Manufacturing continues to struggle, and its weakness could prevent economic growth from picking up in the July-September quarter.

Orders for durable goods dropped 7.3 percent in July, the Commerce Department said Monday, the steepest drop in nearly a year. But excluding the volatile transportation category, orders fell only 0.6 percent. Both declines followed three straight months of increases.

Durable goods are items meant to last at least three years.

Economists tend to focus on orders for so-called core capital goods. Those orders fell 3.3 percent, but the drop followed four straight months of gains.

Core capital goods can show businesses’ confidence in the economy. They include items that point to expansion — including machinery, computers and heavy trucks — while excluding volatile orders for aircraft and military equipment.

The big drop suggested the third quarter was off to a weaker start than some had hoped. While economists cautioned that this was just one month of data, a few lowered their growth estimates for the July-September quarter after seeing the durable goods report. Economists at Barclays Capital now predict third-quarter growth at an annual rate of 1.9 percent, down from their previous forecast for 2.1 percent.

“At the very least, it is a reminder that the expected pickup in economic growth in the second half of the year will be gradual,” said Paul Ashworth, an economist at Capital Economics.

One bright spot was that unfilled orders for durable goods rose to their highest level since record-keeping began in 1992. Those are orders that were placed in previous months but had yet to be shipped. The increase suggested that output could remain steady in the coming months, despite the weak month of orders in July.

And orders for autos and auto parts rose 0.5 percent, the second monthly gain. Auto sales jumped 14 percent in July compared with a year earlier.

Manufacturing has slumped this year, hurt by weakness overseas that has dragged on American exports. But there have been signs that factory activity could pick up in the second half.

Factory Goods Orders Drop Steeply in March

WASHINGTON (AP) — Orders for long-lasting factory goods fell in March by the most in seven months. The drop reflected a steep decline in commercial aircraft demand and little growth in orders that signal future business investment.

The Commerce Department said on Wednesday that orders for durable goods declined 5.7 percent in March. That followed a 4.3 percent gain in February, which was revised lower.

Weaker economies overseas and the impact of across-the-board government spending cuts have made businesses more cautious, reducing demand for manufactured goods. Spending on military equipment also fell sharply last month.

Durable goods are items expected to last at least three years. Orders for durable goods tend to fluctuate sharply from month to month, and economists cautioned against reading too much into one monthly decline.

A measure of business investment plans, which include industrial machinery and computers, ticked up 0.2 percent last month. Economists pay close attention to so-called core capital goods orders because they strip out more volatile defense and aircraft orders.

Increases last month in both orders and shipments of core capital goods suggest businesses increased spending on equipment and software in the January-March quarter. That probably contributed to economic growth in the first quarter.

Still, most of the quarterly gain reflected a huge increase in January. Orders fell sharply in February and rose only slightly last month. That indicates businesses may spend less on equipment in the April-June quarter, economists said.

“This doesn’t look like we’re entering some kind of downward spiral,” said Jonathan Basile, an economist at Credit Suisse. “This seems like a downshift from stronger growth.”

The overall decline in durable goods was exacerbated by a 48.2 percent fall in commercial aircraft orders. Boeing reported that it received orders for only 39 aircraft, compared with 179 in the previous month.

Orders for military aircraft and other military goods also dropped. That most likely reflects the impact of automatic government spending cuts that began on March 1. Joseph LaVorgna, an economist at Deutsche Bank, noted that orders for defense equipment had fallen to their lowest level in over seven years.

Excluding aircraft and transportation demand, orders for durable goods dropped 1.4 percent, the second straight decline.

Demand fell in most types of goods. Orders dropped for metals like steel and aluminum, metal parts, electrical equipment and appliances and defense aircraft. Orders increased for computers and communications equipment.

Many economies overseas were also sluggish, reducing exports. China’s manufacturers grew at a slower pace in March, according to a survey released on Monday, as export orders and employment declined. Europe’s economy has been in recession.

Economists on average are projecting that the American economy grew at a healthy annual rate of about 3 percent in the first quarter, up from only a 0.4 percent rate in the fourth quarter of last year. The Commerce Department will release its first estimate for January-March growth on Friday.

But many economists say they expect growth has begun to slow to a rate of 2 percent or less in the current April-June quarter.