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Defense Spending Decrease Causes Drop in US Durable Goods Orders

June 25, 2014
Orders for defense goods were down $4.0 billion, or 31.4%, and civilian aircraft orders fell by $620 million.

WASHINGTON -- U.S. orders for durable goods fell in May following three months of gains, driven by a sharp monthly fall in defense goods, Commerce Department data showed Wednesday.

New orders for durable goods fell by $2.4 billion, or 1%, last month from April, when new orders had risen 0.8%.

Nearly all of the fall was in defense goods, and secondly, civilian aircraft. Orders for defense goods were down $4.0 billion, or 31.4%, and civilian aircraft orders fell by $620 million. Both are key but often very volatile components of the total.

Offsetting those were a 2.1% rise in orders for automobiles and auto parts, and gains in orders for primary and fabricated metals.

“The May durable goods report adds to the sense that the rebound from the brutal first quarter of this year, in which real GDP contracted by nearly 3%, is disappointing at best,” said Cliff Waldman, senior economist for the Manufacturers Alliance for Productivity and Innovation (MAPI).

Waldman provided the following analysis.

“The demand data for industry sectors that create inputs for a wide range of goods supply chains testify to the uneven nature of manufacturing activity, Waldman added. “ Primary metals demand increased by a strong 1.9%, while fabricated metal products demand increased by 0.3% and machinery demand fell by 0.3%. Alarmingly, fabricated metal products demand is down by 3.2% on a year-over-year, year-to-date basis.

“While total new orders remain moderately healthy on a year-over-year, year-to-date basis, at 4.2% growth, the current concern is the direction of the economy and the manufacturing sector after the very difficult early months of 2014,” Waldman added. “While some of the 2.9% GDP contraction can be attributed to a very taxing and persistently stormy winter, the magnitude of the contraction suggests that the economy’s weaknesses remain well in place more than five years after the end of the worst downturn of the post–World War II era.

“A noteworthy weakness has been the failure of business equipment spending to engage in an expected post-recession rebound. Capital spending has been atypically weak since about 2000. During the first quarter of 2014, business equipment spending contracted by 2.8%. While the durable goods data do point to a second quarter bounce, it does not look like it will be a particularly strong one. The past two months of data for new orders for nondefense capital goods excluding aircraft, a proxy for business equipment spending, have been sluggish, with a 1.1% contraction in April and a 0.7% increase in May.

“The muted performance of capital spending reflects fundamental uncertainty about the direction and strength of the U.S. economy after five years of historically weak post-recession performance. For the manufacturing sector, the state of the world economy remains a worry as well. The 8.9% contraction in export demand during the first quarter of 2014 was an unwelcome sign in this regard and reinforces a range of regional concerns, from a deflation threat in Europe to a murky outlook for China and broader concerns about the entire developing world. The U.S. economy will likely resume a path of moderate growth for the balance of this year and into 2015, while manufacturing will continue to show moderate and possibly accelerating growth. But the risks for the economy and for the factory sector are clearly to the downside.”

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