Durable Goods Orders Rise In December

Thu, 01/26/2012 - 9:30am
Martin Crutsinger, AP Economics Writer


WASHINGTON (AP) -- A rebound in business spending on machinery and equipment lifted orders for long-lasting manufactured goods in December, offering more evidence that the economy is gaining momentum at the start of the year.

Orders for durable goods -- products that are expected to last at least three years -- rose 3 percent last month, the Commerce Department said Thursday. And so-called core capital goods, which are viewed as a good measure of business investment plans, hit an all-time high.

Economists noted that a surge in volatile demand for commercial aircraft also boosted orders. And businesses likely stepped up spending to take advantage of a tax break on equipment, which expired at the end of December.

Still, most analysts saw the report as an encouraging sign for growth in early 2012.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, said bank lending to businesses is accelerating, which should lead to a "huge wave of catch-up" spending by smaller firms.

"This could be a last-gasp surge ahead of the expiration of the 100% tax deduction ... but we doubt it," Shepherdson said. "The underlying trend in orders is rising strongly."

A sign of that spending was evident after Caterpillar said its fourth-quarter profit jumped 60 percent. The world's largest maker of construction and mining equipment also issued 2012 guidance above Wall Street predictions.

Economists pay close attention to core capital goods, such as computers and machinery, because they are viewed as a good way of gauging business investment plans.

Demand for these goods rose a solid 2.9 percent in December. And the increase pushed orders for core capital goods to a record $68.9 billion.

Orders have climbed more than 45 percent since hitting a recession low in April 2009. That has kept factories busy and helped the economy grow at a slow but steady pace.

Businesses cut back on core capital goods in October and November, which drew some concerns from economists. The Federal Reserve on Wednesday also cited the decline while warning that the economy remains vulnerable.

Paul Ashworth, chief U.S. economist at Capital Economics, said that the slowdown in business investment would be reflected in overall economic growth for the October-December quarter, which the government will release on Friday. He estimated the economy grew at an annual rate of 2.4 percent in the fourth quarter, even though business investment probably was stagnant during that period.

"The good news is that the growth rate of business investment should accelerate again in the first quarter," Ashworth said. That will help to offset a projected slowdown in consumer spending. He estimates growth in the current quarter at around 2 percent.

The overall December rise in orders for durable goods was led by an increase of 18.9 percent in demand for commercial aircraft. Orders for autos and auto parts rose 0.6 percent.

Excluding transportation, orders would have risen 2.1 percent in December, the best showing in this category since a 2.6 percent rise last March.

Demand was up for primary metals such as steel, machinery and communications equipment.

An increase in total durable goods orders bolstered the view sketched by other data showing the economy picked up in recent months.

Companies are hiring more, factories are making more goods and more people are buying cars. Still, the threat of a recession in Europe is likely to be a drag on the global economy.

Manufacturing has been a bright spot in the current recovery. U.S. factory activity has been lifted a surge in exports but economists are worried that the growth in exports could falter if overseas markets such as Europe show signs of slowing. Europe accounts for about one-fifth of U.S. exports.

Economist and Council Director, The Machinery and Allied Products Institute (MAPI) has added his opinion on the new durable goods data:

“Like other recent data, the December report on demand for long-lasting goods paints a picture of an economy that ended a volatile and challenging 2011 on a positive note,” said Cliff Waldman, Economist for the Manufacturers Alliance for Productivity and Innovation (MAPI). “Total new orders, now up during five of the last six months, increased a strong 3 percent after an even stronger 4.3 percent advance in November and for the year registered a solid 10 percent gain over 2010 levels. Excluding the often volatile transportation component, orders were up a more modest 2.1 percent in December but were nonetheless a nice acceleration from a weak 0.5 percent increase during the previous month. Even more encouraging were the data on new orders for nondefense capital goods excluding aircraft. A widely accepted proxy for business equipment investment, this indicator had been flashing clear signs of slowing in recent months but increased a significant 2.9 percent in December and, like total new orders, was up by 10 percent for the year as a whole. 

“The sharp positive turn in equipment spending during December might very well have been motivated by concerns about the expiration of equipment expensing provisions,” he added. “But the tenor of the December report was positive overall for U.S. manufacturing strength, with strong gains in such sectors as machinery and primary metals. However, given the spate of data-distorting events that occurred during 2011, from the Japanese earthquake to unnerving fights over the U.S. debt ceiling, the December numbers are not necessarily indicative of a sea change in the U.S. outlook, especially in light of clear evidence of widespread slowing in global growth. The most likely forecast for U.S. manufacturing is for positive but moderating output growth.”


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