U.S. Economy: Durables Orders Decline by Most in Seven Months

Sep 26, 2007 - Orders for American-made jetliners, automobiles and communications gear fell in August by the most in seven months, raising concern that businesses are losing confidence in the economy.

Demand for durable goods fell a greater-than-forecast 4.9 percent, the Commerce Department said today in Washington. Excluding transportation equipment such as airplanes, orders declined 1.8 percent after a 3.4 percent gain.

The report suggests business investment, which had been forecast to make up for a slowdown in consumer spending triggered by the housing recession, may instead weaken. Falling orders reinforce economists' predictions that economic growth will slow in the final quarter.

"The report makes us a little more worried about business investment in the second half," said Adam York, an economist at Wachovia Corp. in Charlotte, North Carolina. "Businesses are probably making decisions a little more deliberately than they did before the credit crunch."

Economists noted that durable goods figures are volatile, and last month's decrease followed a 6.1 percent gain in July, the biggest jump in almost a year. Treasury securities were little changed immediately after the release and later dropped.

Companies may decide to rein in spending after the meltdown in subprime lending sent financial markets reeling in August, dimming growth prospects.

Mortgage Applications

Mortgage applications fell 2.8 percent last week, led by the biggest drop in purchases since January, a report from the Mortgage Bankers Association today also showed. The group's purchase index dropped 7.3 percent, while its refinancing gauge increased 3.3 percent.

Orders for durable goods, made to last several years, were forecast to fall 4 percent, according to the median of 74 estimates in a Bloomberg News survey, after a previously reported 6 percent rise in July. Estimates ranged from a 7.9 percent decline to 1 percent gain.

Excluding transportation equipment, orders were projected to fall 1 percent, according to the survey median, after the 3.8 percent increase the government reported earlier.

Economists prefer to track the durable goods figures excluding transportation because orders for aircraft and automobiles can vary widely from month to month, obscuring underlying trends in spending.

Orders for commercial aircraft plunged 41 percent in August after increasing 13 percent a month earlier.

Boeing Co., the world's second-largest maker of commercial jets, received 75 orders in August, about half the 149 the Chicago-based company had in July, according to figures issued earlier this month. It shipped 42 planes, compared with 33 a month earlier.

Auto Strike

Demand for autos dropped 6.2 percent after an 11 percent gain the prior month that was the biggest in four years.

Auto dealers in July may have been trying to boost stockpiles ahead of a threatened strike against General Motors Corp. Detroit-based GM today reached a tentative four-year contract agreement with the United Auto Workers, ending a two- day strike. Union leaders will seek ratification this weekend and workers could return to picket lines if they reject the contract.

Non-defense capital goods orders excluding aircraft, a proxy for future business investment, fell 0.7 percent, after rising 0.9 percent in July. Shipments of those items, used in calculating gross domestic product, increased 0.8 percent after little change the prior month.

One bright spot in the report was that unfilled orders for capital equipment rose 1.2 percent, suggesting manufacturers had enough of a backlog to keep production lines busy in coming months. Inventories of all durable goods dropped 0.1 percent, the first decline since February 2006.

Lower Forecasts

Economists at Morgan Stanley in New York lowered their forecast for third-quarter growth to an annual rate of 2.2. percent following the durable goods report, from a prior estimate of 2.4 percent.

The drop in inventories 'should set the stage for an eventual pick-up in production - especially with unfilled orders continuing to surge,' said David Greenlaw, chief U.S. fixed- income economist at Morgan Stanley, in a note to clients.

The economy will grow 2 percent this year, the least since 2002, based on the median estimate of 64 economists surveyed by Bloomberg News Aug. 30 to Sept. 7. Economists projected 2.5 percent growth at the beginning of the year.

Less Confidence

Confidence among chief executives fell this quarter to the lowest point in four years, according to a survey released Sept. 17 by the Business Roundtable in Washington. The Duke University/CFO Magazine Business Outlook index also showed a similar decline this month among chief financial officers.

Demand for U.S. exports and lean stockpiles outside of the auto industry suggest manufacturing is unlikely to collapse, economists said.

U.S. steel inventories fell in August to the lowest since 2005, the Metal Service Center Institute, a trade association for metals industries, said Sept. 20.

Fort Wayne, Indiana-based Steel Dynamics Inc., the fifth- largest U.S.-based steelmaker, said last week that it will invest $85 million in an iron-making venture in Minnesota with Kobe Steel Ltd. to boost output of raw materials used in steelmaking.