Orders for long-lasting US manufactured goods fell sharply in August, suggesting the main engine of the economic recovery was stalling even as a report showing a drop in new claims for jobless aid offered a hopeful sign on the labour market.
While weak demand for aircraft and automobiles accounted for much of the drop in orders last month, the Commerce Department report on Thursday underscored the damage being inflicted by the uncertainty over US fiscal policy, Europe's debt troubles and a slowdown in China.
"Given the uncertainty associated with the fiscal cliff, there is certainly a wait-and-see attitude which is impacting a lot of the data," said Omair Sharif, an economist at RBS in Stamford, Connecticut. The so-called fiscal cliff refers to the $500 billion or so in expiring tax cuts and government spending reductions set to take hold in 2013 if the US Congress fails to agree on an orderly way to reduce a huge budget deficit.
The Commerce Department said durable goods orders dived 13.2 percent, the largest drop since January 2009, when the economy was in the throes of a recession. The decline primarily reflected weak demand for aircraft and automobiles, and transportation orders fell 34.9 percent. Plane maker Boeing reported only one aircraft order last month versus 260 in July. But orders were down for a wide range of goods, and even excluding transportation, orders fell 1.6 percent, dropping for a third consecutive month. The fall was in sync with other data indicating a marked cooling in the production side of the economy.
Economists polled by Reuters had expected orders for durable goods - items from toasters to aircraft that are meant to last at least three years - to fall 5 percent, with non-transportation orders rising marginally. Unfilled orders dropped by the most since December 2009, pointing to weak factory activity in the months ahead. "The thesis that manufacturing activity is likely to struggle for the remainder of the year continues to build," said John Ryding, chief economist at RDQ Economics in New York.
Underscoring the economy's weakness, the government revised its measure of second-quarter growth to just a 1.3 percent annual pace from 1.7 percent, largely to reflect the impact a drought in the Midwest had on farm inventories. Inventories lopped off almost half a percentage point from GDP growth in the last quarter. However, economists expected this to reverse in the third quarter.
Durable goods inventories set a fresh record high in August, prompting economists at Macroeconomic Advisers to raise their third-quarter GDP growth estimate by one-tenth of a percentage point to 1.8 percent. There was also bad news on the housing market, which has been one of the economy's relative bright spots. Contracts to buy previously owned homes fell in August, providing a counterpoint to other recent data that have shown activity in the housing market picking up, a separate report showed. However, not all the news on Thursday was downbeat. The Labour Department showed the number of Americans filing new claims for jobless benefits fell 26,000 last week to a two-month low of 359,000. The four-week moving average for new claims, a better measure of labour market trends fell for the first time after five weeks of increases.
Despite the drop in claims last week, labour market weakness was expected to persist for a while because of anxiety over higher taxes and deep government spending cuts in January and slowing global growth, economists said. Sluggish job gains and stubbornly high unemployment spurred the Federal Reserve this month into launching a third round of bond purchases to drive down already low interest rates.
The US central bank vowed to buy $40 billion worth of mortgage-backed securities each month until it sees a sustained upturn in the labour market. Mortgage finance company Freddie Mac said the mortgage-backed securities purchases helped push the average rate on a 30-year fixed rate mortgage down to a record low of 3.40 percent this week.
In a preliminary estimate of an upcoming annual revision to its main employment measures, the Labour Department said it likely undercounted job growth in the 12 months through March by 386,000. The encouraging news on the labour market was eclipsed by the weak durable goods report. Orders for non-defence capital goods excluding aircraft, a proxy for business spending plans, rose 1.1 percent in August, only partly reversing a 5.2 percent slide the prior month.
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