Factory Orders Fall by Most in 3 Years as Aircraft Demand Drops

Wednesday, 02 May 2012 10:18 AM

 

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Demand for U.S. factory goods dropped in March by the most in three years, driven lower by a sharp fall in volatile orders for commercial aircraft. Still, more recent data suggest the decline may be temporary.

The Commerce Department said Wednesday that orders for factory goods fell 1.5 percent. That was the steepest decline since March 2009, when the economy was mired in recession. Orders rose 1.1 percent in February.

A key reason for the drop was aircraft orders plummeted nearly 50 percent. Those orders can fluctuate sharply from month to month.

Excluding transportation goods, orders were unchanged. Demand for less durable items, such as food, chemicals and gasoline, rose 0.5 percent.

"Despite this month's decline, new orders have been on a rising trend," Steven Wood, an economist at Insight Economics, said in a note to clients. "The demand for manufactured goods is recovering moderately and irregularly."

Factory orders have rebounded after plummeting during the recession. Orders in March totaled $460.5 billion, 37 percent higher than the recession's low point reached three years ago. That's still 4.2 percent below the peak reached in December 2007, the month the recession began.

Other data suggest the March decrease won't endure. A private survey released Tuesday found that the manufacturing activity grew in April at the fastest pace in 10 months. New orders, production and a measure of hiring all rose. The increase in new orders points to rising output in the coming months.

The April survey from the Institute for Supply Management helped the Dow Jones industrial average close Tuesday at its highest level in more than four years. It followed a series of weaker reports in recent weeks that showed hiring slowed, applications for unemployment benefits rose and factory output dropped.

There were positive signs in the government's report on March factory orders, too. Orders for so-called "core" capital goods, a measure of business investment, fell only 0.1 percent. That's much less than the government reported in a preliminary estimate last week.

Still, companies cut back on a variety of goods meant to last at least three years. Demand for steel and other metals, industrial machinery, and computers all dropped.

Autos and auto parts orders were unchanged in March, after big gains in January and February. That indicates auto production could slow.

Sales of cars and trucks in April were mixed. Toyota and Chrysler on Tuesday reported big U.S. sales gains for April, but those gains came at the expense of General Motors and Ford. Auto production has been solid in recent months as Americans have increased their purchases of cars and trucks, a good sign for further gains in factory output.

Businesses increased their spending on equipment and software in the first quarter at the weakest pace in three years, a report last week showed.

Many economists think orders slowed in part because an investment tax credit expired at the end of last year. Orders had jumped ahead of that expiration.

Factories account for only about 9 percent of total payrolls but added 13 percent of the new jobs created last year. Manufacturers have added 120,000 jobs in the past three months, about one-fifth of all net gains during that period.

The government reported last week that the overall economy grew at an annual rate of 2.2 percent in the January-March period. While that was down from growth of 3 percent in the final three months of last year, it was an improvement over the 1.7 percent economic growth turned in for all 2011.

Economists believe increased hiring will help support stronger gains in incomes this year, which will provide support for consumer spending. This should result in a slightly better economic performance this year with growth coming in around 2 percent to 2.5 percent. 

 

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