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Tags: Orders | durable | capital | Goods

Orders for Capital Goods Decrease by Most Since November

Friday, 24 August 2012 08:42 AM EDT

Demand for U.S. capital goods such as machinery and communications gear dropped in July by the most in eight months, indicating companies are pulling back on investment.

Bookings for non-military capital equipment excluding planes slumped 3.4 percent, a Commerce Department report showed in Washington. Total orders for goods meant to last at least three years jumped 4.2 percent, paced by a 54 percent surge in demand for civilian aircraft.

Possible U.S. tax increases and spending cuts and a global economic slowdown are hurting companies such as Caterpillar Inc. and Deere & Co., indicating manufacturing will no longer be a driver of the expansion. Federal Reserve policy makers have signaled that are prepared to take further steps to sustain the expansion if growth doesn’t pick up.

“Companies just want to be prepared for the worst-case scenario,” Omair Sharif, a U.S. economist at RBS Securities Inc. in Stamford, Connecticut, said before the report. “They want to enter the post-election and post-fiscal cliff period with lean inventories. That’s going to be a drag on manufacturing.”

The median forecast of 75 economists surveyed by Bloomberg called for a 2.5 percent gain in total orders. Estimates ranged from a decline of 2.5 percent to a 7 percent increase.

Bookings for non-defense capital goods excluding aircraft are considered a proxy for future business investment in items such as computers, engines and communications gear.

Machinery Slump

Last month’s drop reflected a 3.6 percent decrease in demand for machinery and a 4 percent slump in communications equipment. Figures for the prior month were also revised down to show a 2.7 percent decline for June, which was previously estimated as a 1.7 percent fall.

Shipments of those capital goods, used in calculating gross domestic product, were unchanged in July after rising 1.5 percent the prior month.

Last month’s decrease in capital goods orders extends a pattern of declines early in a quarter that are sometimes reversed later. Demand has dropped in the first month of a quarter in all but two instances since the beginning of 2009.

Civilian aircraft bookings surged in July after rising 33 percent gain the prior month. Boeing Co., the largest U.S. aircraft maker, said it received 260 orders last month, up from 24 in June.

Regional Reports

Regional reports indicate a slowdown for factories in August. Manufacturing in the Philadelphia region shrank for the fourth consecutive month, while New York-area factories unexpectedly contracted for the first time in 10 months.

The lingering domestic fiscal policy debate could be holding back orders for companies like Caterpillar as businesses await the end-of-year “fiscal cliff” deadline.

“One of the drags that we see right now, and we hear this actually from the field, is that uncertainty around the tax increases at the end of the year,” Michael DeWalt, director of investor relations at the Peoria, Illinois-based construction manufacturer, said at an Aug. 8 conference. The government spending cuts at the end of the year are also “making everybody nervous and are probably delaying purchases,” he said.

The global slump is also a headwind. Deere cut its full- year profit forecast Aug. 15 as sales slow in Asia and Latin America, undermining the growth strategy at the world’s largest manufacturer of agricultural equipment.

Order Cancellations

Boeing has been influenced. The Chicago-based plane maker this week lost an order for 35 Dreamliners with a list price of $8.5 billion in the biggest 787 cancellation yet as Australia’s Qantas Airways Ltd. scrapped a contract after deliveries were delayed and demand cooled. Cathay Pacific Airways Ltd. and Singapore Airlines Ltd. are among foreign carriers that have also pulled back as international travel has slowed.

The auto industry has been one of the economy’s few bright spots, even as vehicle purchases declined in July from the prior month. The industry bolstered the U.S. economy with first-half sales up 15 percent, setting a pace for more than 14 million annual sales and the best year since 2007.

Today’s data showed orders for motor vehicles and parts climbed 13 percent in July, today’s report showed.

The Federal Reserve signaled this week that it’s ready to take additional steps to spur the recovery. Many policy makers said additional stimulus probably will be needed soon unless the economy shows signs of a durable pickup, according to minutes of the central bank’s most recent meeting.

“Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery,” according to the record of the Federal Open Market Committee’s July 31-Aug. 1 gathering.

© Copyright 2023 Bloomberg News. All rights reserved.

Friday, 24 August 2012 08:42 AM
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