U.S. Durable Goods Orders Drop 4.3 Percent
WASHINGTON (AP) -- Businesses cut back sharply on their orders for long-lasting manufactured goods in December with a key category that signals business investment plans falling by the biggest amount in five months.
Orders for durable goods fell 4.3 percent in December compared with November, when orders had risen 2.6 percent, the Commerce Department reported Tuesday. The weakness was led by a big 17.5 percent drop in the volatile category of commercial aircraft.
There was widespread weakness in a number of categories including a 1.3 percent decline in demand for non-defense capital goods excluding aircraft. This category is viewed as a proxy for business investment plans.
Some of the December weakness probably reflected a temporary dip following November's big jump which had been driven by businesses rushing to take advantage of expiring tax breaks.
The December decline came as a surprise to economists. The consensus view among economists was that orders would post a moderate rise reflecting what they believe is an improving outlook for U.S. manufacturers.
Jennifer Lee, senior economist at BMO Capital Markets, said that a good portion of the decline in commercial aircraft orders resulted from the government's seasonal adjustment process which trimmed a tripling in demand for airplanes that Boeing reported for the month.
She said demand should rebound in coming months although it appeared that businesses were proceeding with caution at the moment.
In addition to the big drop in orders for commercial aircraft, orders for motor vehicles and parts fell 5.8 percent. That was likely a temporary dip given the strong sales that automakers are enjoying.
Orders for primary metals such as steel fell 2.1 percent while demand for computers and other electronic products dropped 7.8 percent. Orders for machinery rose 0.8 percent.
A key gauge of manufacturing activity remained near a 2½ year high in December. The Institute for Supply Management said its manufacturing index registered 57 in December, only slightly down from a 57.3 reading in November. The December level was still the second-highest reading since April 2011. Any reading above 50 signals growth in manufacturing.
Consumers are buying more autos and houses, boosting demand for such items as steel, furniture and other manufactured goods.
The ISM's manufacturing index had increased for six straight months through November. In a good sign for the future, a measure of new orders in the ISM rose in December to the highest level since June 2011.
Economists are hoping that 2014 will mark a turning point for an economy that has performed at sub-par rates for much of the time since the recession ended in June 2009. Many analysts are forecasting the economy will grow by around 3 percent in 2014, up by a full percentage point from 2013.
Much of the hope for a better 2014 reflects a belief that the federal government will be less of a drag this year. In 2013, higher taxes and across-the-board spending cuts trimmed about 1.5 percentage points from growth.
U.S. manufacturers are also being helped by an improving outlook in many overseas markets. Europe's economy is picking up slightly after a long recession.
The rising economic strength is giving the Federal Reserve the leeway to scale back slightly on its support programs. The Fed in December announced it was trimming a monthly bond buying program from $85 billion to $75 billion and indicated it would make further cuts at upcoming meetings if the economy and labor market continue to improve. The bond purchases were aimed at pushing long-term interest rates lower as a way to stimulate greater economic activity.
The Fed is holding its first meeting of 2014 on Tuesday and Wednesday. It will be the last time Federal Reserve Chairman Ben Bernanke will preside. He is stepping down at the close of business on Friday and will be succeeded by Fed Vice Chair Janet Yellen.
Daniel Meckstroth, Chief Economist for the Manufacturers Alliance for Productivity and Innovation (MAPI) has weighed in to Manufacturing.net with some thoughts on these numbers:
“Durable goods orders declined 4.3 percent in December 2013, more than offsetting the 2.6 percent gain in November,” noted Meckstroth. “The reduction in orders was led by very large percentage declines in defense capital goods, civilian aircraft, computers and electronic products, and motor vehicle orders. Government austerity led to lower military equipment spending last month (which was not new), and defense capital goods orders fell 20 percent in 2013 as a whole. The reduced electronic equipment and motor vehicle orders were likely affected by the ending of accelerated depreciation.
“Nondefense capital goods orders excluding aircraft, a leading indicator for overall business equipment investment, declined 1.3 percent in December following a strong 2.6 percent gain the prior month,” he added. “The pattern of surge and setback was indicative of 2013. The fundamentals for business equipment investment are very favorable but firms remain hesitant to commit to long-term investments because of the clouds of uncertainty that persist, such as political gridlock at home and poor economic policies in our export markets abroad.
“Despite the setback in December durable goods orders, MAPI remains optimistic that the pace of economic growth will accelerate in 2014,” Meckstroth concluded. “This economic pickup will be led by a faster pace of business equipment investment.”