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Orders Jump For Key Long-Lasting Factory Goods

Wed, 02/27/2013 - 10:37am
Christopher S. Rugaber, AP Economics Writer

WASHINGTON (AP) -- Orders for U.S. factory goods that signal business investment plans jumped last month by the most in more than a year, suggesting companies are confident about their business prospects.

The Commerce Department said Wednesday that orders for so-called core capital goods, which include industrial machinery, construction equipment and computers, rose 6.3 percent in January from December. A sharp fall in demand for commercial aircraft caused overall durable goods orders to drop 5.2 percent, the first decline since August.

Orders for commercial aircraft are volatile from month to month and can cause large swings in the overall figure. Boeing reported orders for only two planes in January, down from 183 in December. Orders for defense equipment also plummeted by the most in more than 12 years.

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

The increase in core capital goods suggests companies are willing to expand their production capacities despite worries that automatic government spending cuts will slow the economy in the coming months.

"The fact remains that capital spending appears to be holding up very well," Dan Greenhaus, chief global strategist at BTIG, a brokerage firm. "In fact, it appears to be accelerating."

Still, the jump in orders wasn't broad-based and occurred mostly in machinery and manufactured metal products. Orders for computers and communications equipment both fell and orders for autos and auto parts were unchanged.

About $85 billion in spending cuts are scheduled to kick in Friday and there is little sign that the White House and Congress will reach a deal to avoid them. Defense Department officials may have slowed purchases in January in anticipation of the cutbacks.

Business investment plans have held up in recent months despite the uncertainty surrounding tax and spending policies. Core capital goods orders dipped 0.3 percent in December but posted strong gains of 3.3 percent in November and 3 percent in October.

The report suggests U.S. manufacturing is strengthening. The Institute for Supply Management said earlier this month that factory activity grew in January at the fastest pace in nine months. Measures of new orders and hiring both rose.

But industrial production fell in January after two months of increases, the Federal Reserve said. Much of the decline reflected a big drop in auto production that was likely temporary. The auto industry is coming off its best year for sales in five years. Sales continue to rise, so production will likely rebound in February.


Daniel Meckstroth, Chief Economist for the Manufacturers Alliance for Productivity and Innovation (MAPI), has weighed in with his opinion on the latest numbers: “The U.S. Census Bureau report on durable goods shows that new orders for durable goods fell 5.2 percent in January 2013 after posting a 3.7 percent gain in December 2012. Durable goods orders are erratic and volatile; they are a mixture of very expensive, long lead-time products and categories that are short order, so order growth by industry is important. The January report is a good example of the negative top line failing to reflect the positive impact of order activity on near-term production.

“The primary reason for the decline in durable goods orders is the severe decline in both civilian and military aircraft orders. Defense aircraft orders fell 63.8 percent and civilian aircraft orders dropped 34 percent in January 2013 from December 2012,” Meckstroth added. “The federal budget sequester undoubtedly played a part in lower military aircraft orders and the battery problem with the Boeing 787 aircraft likely had some role fewer civilian aircraft orders. In both cases, the several-year lead time for aircraft will not affect current activity. Primary metals and computer and electronic products industry orders also fell in January. Importantly, however, orders for business machinery increased a large 13.5 percent.

“A key indicator for business equipment spending is orders for nondefense capital goods excluding aircraft,” Meckstroth concluded. “The indicator increased 6.3 percent in January and is a welcome sign that businesses are not completely put off by the political budget deadline gamesmanship in Washington. Business equipment spending growth is an important element in sustaining the economic expansion.”

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