U.S. Durable Goods Orders Dive in January

Feb. 28, 2012
End of tax break cited for decline, but capital equipment spending expected to outpace overall economic growth.

New orders for U.S .durable goods made a broad-based dive in January after three straight months of gains, led by a slump in commercial aircraft orders, government data showed Tuesday.

But analysts blamed the fall on the end of a special capital investment tax break rather than a slowdown in the economy.

New durable goods orders fell 4.0% from January to $206.1 billion, the Commerce Department reported.

It was the steepest decline since January 2009, when orders plunged 13.2%, and was much worse than the average analyst forecast of a 1.4% drop.

Excluding the transportation sector, new orders fell 3.2%.

New orders for transportation equipment were the biggest decliner, the department said, down 6.1%. Nondefense aircraft orders plunged 19.0%.

But the overall decline was broad-based, including machinery, computers and defense aircraft.

Ian Shepherdson at High Frequency Economics said the weak January number appeared to be a one-time adjustment to the December 31 expiration of bonus tax deductions for capital spending.

"Unquestionably, it looks bad, but the context is important; we see no evidence of underlying slowing in the industrial economy so we look for a rebound in February and the re-emergence of the upward trend over the next couple of months," he said.

The January decline followed solid growth in both November and December 2011, said Daniel J. Meckstroth, chief economist for the Manufacturers Alliance for Productivity and Innovation (MAPI). "Durable goods orders are notoriously volatile and month-to-month changes are difficult to interpret. Taking a longer perspective, new orders are up 8.8% in January 2012 from January 2011 and nondefense capital goods orders excluding aircraft are up 6.5% over the same time period."

"The general economy is growing at a sluggish, modest rate and capital equipment investment spending is growing much faster than overall GDP growth," he added. "Defense capital goods orders will fall sharply but commercial aerospace orders are likely to post strong growth. For most business equipment categories, there is pent-up demand for new equipment; equipment wears out and needs to be replaced and new equipment is more productive. A relatively high utilization rate in the manufacturing sector is consistent with capacity expanding business equipment spending."

"Nevertheless," Meckstroth concluded, "economic growth is weak, so it is unrealistic to expect a capital spending boom. We believe that business equipment investment fundamentals are conducive to growth and that capital equipment spending growth will exceed overall economic growth this year and next."

The Commerce Department upwardly revised the December increase to 3.2%.

Recent reports have suggested that manufacturing, a key driver of the economic recovery, started the year on a positive note.

The closely watched Institute for Supply Management's manufacturing index rose to 54.1% in January from 53.1% in December, led by a jump in new orders.

Copyright Agence France-Presse, 2012

Additional reporting by Steve Minter.

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