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Weak U.S. durable goods data dims growth outlook

Washers and dryers are seen on display at a store in New York July 28, 2010. REUTERS/Shannon Stapleton
Washers and dryers are seen on display at a store in New York July 28, 2010. REUTERS/Shannon Stapleton

By Lucia Mutikani

WASHINGTON (Reuters) - Orders for long-lasting U.S. manufactured goods recorded their biggest drop in nearly a year in July and a gauge of planned business spending on capital goods also tumbled, casting a shadow over the economy early in the third quarter.

The report on Monday added to other data for July on industrial production, housing starts and new home sales that have suggested economic growth this quarter will probably not accelerate as much as economists had hoped.

"So far, things aren't looking that great," said Millan Mulraine, senior macro strategist at TD Securities in New York. "We are expecting a bounce in growth, it can still come, but it may not necessarily be in the first month of the quarter."

The Commerce Department said durable goods orders dropped 7.3 percent as demand for items ranging from aircraft to computers and defense equipment fell.

It was the biggest decline since last August and snapped three consecutive months of gains.

Orders for durable goods - items from toasters to aircraft that are meant to last three years or more - had increased 3.9 percent in June. Economists had expected orders to fall 4.0 percent last month.

Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, fell 3.3 percent, breaking four straight months of gains. It was the biggest drop since February.

Orders for these so-called core capital goods increased 1.3 percent in June. Economists had expected this category to rise 0.5 percent in July.

The decline in demand suggested the manufacturing sector, which hit a speed bump early in the year, will probably not bounce back as quickly as many economists had anticipated.

The report was at odds with a survey from the Institute for Supply Management released earlier this month that showed new orders at their highest level in more than two years in July.

Still, it was the latest sign that economic growth might not accelerate much from the second quarter's 1.7 percent annual pace. Industrial output was flat in July, while residential construction increased less than expected and new home sales tumbled last month.

SHIPMENTS FALL

Troublingly, the durable goods report showed that shipments of core capital goods, which are used to calculate equipment and software spending in the government's measure of gross domestic product, fell 1.5 percent in July.

Shipments had dropped 0.8 percent in June. While shipments tend to decline in July because not all components in this category are seasonally adjusted, economists noted the drop last month was the largest since 2008.

Forecasting firm Macroeconomic Advisers lowered its third-quarter GDP growth estimate by two tenths of a percentage point to a 1.8 percent rate. Barclays cut its GDP growth forecast to a 1.9 percent rate from 2.1 percent.

Economists said while the drop in core capital goods orders could attract the attention of some Federal Reserve officials, it was unlikely the U.S. central bank would step away from a plan to start reducing its monthly bond purchases before the end of the year.

Some blamed the weak July data on a recent spike in interest rates in anticipation of a reduction in the Fed's bond buying, which many think will come at its next meeting on September 17-18.

"When looking for signs that interest rate increases are too much for the economy to handle, durable goods, like housing, are a leading indicator of weakness in the broader economy," said Chris Low, chief economist at FTN Financial in New York.

"We expect the Fed is determined to start reducing the size of asset purchases regardless, in part because the market has already begun to reverse some of the recent rate pressure without the Fed's help."

U.S. Treasury debt prices rose on the data, pushing yields lower, while the dollar fell against the yen. U.S. stocks were up marginally.

Durable goods orders in July were held down by a 19.4 percent plunge in bookings for transportation equipment. That reflected a 52.3 percent drop in orders for civilian aircraft.

Boeing received orders for 90 aircraft in July, down from 287 aircraft the prior month, according to information posted on its website. Orders for motor vehicles gained 0.5 percent after rising 0.2 percent the prior month.

Even excluding transportation, demand for long-lasting manufactured goods was weak almost across the board.

There were declines in orders for computers and electronic products, and demand for electrical equipment, appliances and components also fell. Orders for machinery and primary metals were flat.

Orders for defense capital goods plummeted 21.7 percent in July after hefty gains in the prior months.

(Reporting By Lucia Mutikani; Editing by Andrea Ricci)

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