Weak durable goods orders point to sluggish economy

By Lucia Mutikani

WASHINGTON (Reuters) - Orders for long-lasting U.S. manufactured goods recorded their biggest drop in seven months in March and a gauge of planned business spending rose only modestly, the latest signs of a slowdown in economic activity.

Durable goods orders slumped 5.7 percent as demand fell almost across the board, the Commerce Department said on Wednesday. The drop in orders for these goods - items from toasters to aircraft that are meant to last three years or more - followed a 4.3 percent rise in February.

"We have seen a considerable loss of momentum in the economy and that has been obvious in the round of data we had over the last four weeks or so," said Jacob Oubina, a senior U.S. economist at RBC Capital Markets in New York.

The drop, which was double what economists had expected, provided a fresh indication of cooling at factories that had played a central role in the economy's recovery from recession.

It also joined a range of other data covering items from employment to retail sales that have shown the economy lost a step at the end of the first quarter.

The slowdown, which economists have dubbed the spring swoon, has been largely blamed on belt-tightening in Washington as the government tries to slash its bloated budget deficit.

Uncertainty over the impact of deep government spending cuts, known as the sequester, could be making businesses more cautious about rolling out capital projects.

Last month, non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, edged up 0.2 percent. Orders for these so-called core capital goods had dropped 4.8 percent in February and economists had expected a 0.4 percent increase last month.

"There's clearly rising near-term caution in capital spending plans by businesses as fiscal tightening hits and global growth slows," said Ted Wieseman, an economist at Morgan Stanley in New York.

WEAK BUSINESS SPENDING AHEAD

Financial data firm Markit said on Tuesday its preliminary factory purchasing managers' index hit a six-month low in April, and other regional factory surveys have also exhibited weakness this month.

Against the backdrop of a tame inflation environment, the soft durable goods data strengthened the argument for the Federal Reserve to maintain its monetary stimulus. The U.S. central bank meets next week and is widely expected to keep purchasing bonds at a pace of $85 billion a month.

U.S. Treasury debt prices squeezed higher, while stocks on Wall Street were little changed after the data. The dollar weakened against the yen.

Shipments of core capital goods - which the government uses to calculate equipment and software spending in its gross domestic product report - rose 0.3 percent in March. However, shipments for February were revised to show a 1.2 percent rise rather than the previously reported 1.9 percent increase.

That suggests growth in business spending in the first quarter slowed sharply from the fourth quarter's 11.8 percent annual pace. Indeed, some economists lowered their January-March gross domestic product estimates.

JPMorgan cut its first-quarter GDP forecast by two-tenths of a percentage point to 2.9 percent, while Barclays said there was a downside risk to its 3.0 percent estimate.

The government's report on GDP on Friday is expected to show the economy grew at a 3.0 percent annual rate in the first quarter, according to a Reuters survey, rebounding from a paltry 0.4 percent gain in the final three months of 2012.

Economists, however, look for expansion of only around 1.5 percent or so in the April-June period. Even that forecast is a bit optimistic, some have warned.

"The recent weak tone of the data, along with the anticipated fiscal drag, poses clear challenges," said Michael Feroli, an economist at JPMorgan in New York.

"Nonetheless, we believe the fall in energy prices and the apparent resiliency of housing should provide important ballast to prevent the economy from capsizing."

A second report on Wednesday underscored the firming housing market tone. Applications for loans to purchase homes rose for a second straight week last week as mortgage rates declined further.

While the fall in durable goods orders last month was led by a 15 percent plunge in demand for transportation equipment, other segments of the report, including primary metals and electrical equipment, were also weak.

There were gains only in orders for motor vehicles and computers and electronic products. Unfilled orders fell, showing declining backlogs at the nation's factories.

The absence of an overhang of unsold goods was a hopeful sign as factories will be able to ramp up production once orders pick up. However, economists said any boost to production was unlikely to come in the second quarter.

(Editing by Andrea Ricci and Dan Grebler)

Source: http://news.yahoo.com/durable-goods-orders-fall-broadly-factories-cool-123254119--business.html

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