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U.S. Economy: Durable-Goods Orders Drop, New-Home Sales Slide

Published March 26, 2008

March 26 (Bloomberg) -- Orders for U.S. durable goods unexpectedly fell in February, led by a slump in demand for machinery, as the housing downturn and the prospect of a recession made companies hesitant to invest.

The 1.7 percent drop in demand for products made to last at least three years followed a 4.7 percent decrease in the prior month, the Commerce Department said today in Washington. The department also reported that sales of new homes dropped 1.8 percent last month to a 13-year low.

Businesses are cutting equipment purchases as the biggest housing decline in a quarter century hurts sales, and rising fuel costs erode profit. Only exports are preventing manufacturing from declining even more. Economists at Morgan Stanley now predict the economy will shrink at an annual rate of 0.7 percent in the first quarter, from a previous forecast for a 0.4 percent contraction.

``We're right in the teeth of the recession,'' John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, said in a Bloomberg Radio interview. ``The recession's going to be characterized as the first half of 2008, and waiting for recovery in the second half.''

Treasuries rose after the reports, pushing yields lower. The benchmark 10-year note yielded 3.46 percent as of 11:15 a.m. in New York, down 5 basis points from yesterday. The Dow Jones Industrial Average declined 1 percent to 12,408.5.

`Bit of Fatigue'

``Businesses definitely have shown they are beginning to retrench,'' said Aaron Smith, senior economist at Moody's Economy.com in West Chester, Pennsylvania, in an interview with Bloomberg Television. ``Demand is weakening and investment intentions are showing a bit of fatigue.''

Economists projected orders would rise 0.7 percent, according to the median of 69 forecasts in a Bloomberg News survey, after a previously reported 5.3 percent slump in January. Excluding orders for transportation equipment, which tend to be volatile, bookings fell 2.6 percent, the most since January 2007.

The slump in orders was paced by a 13 percent decline in demand for machinery that was the biggest since comparable records began in 1992.

Bookings for non-defense capital goods excluding aircraft, a proxy for future business investment, decreased 2.6 percent, the most since October. Shipments of those items, used in calculating gross domestic product, dropped 2.1 percent, the most since January 2007.

Orders excluding defense equipment decreased 1.6 percent and bookings for military gear dropped 10 percent.

Economist Estimates

New home sales fell to a 590,000 annual pace, the lowest level since February 1995. Purchases were down 30 percent from February 2007.

Economists had forecast new-home sales would decline to an annual pace of 578,000, according to the median of 71 forecasts in a Bloomberg News survey. Estimates ranged from 560,000 to 600,000. Purchases in January were revised up to 601,000 from a previously estimated 588,000 pace.

Purchases declined in two of four regions, led by a 40 percent plunge in the Northeast, the biggest drop since 1996. Sales improved in the South and West.

The report did contain one bit of positive news. The number of new homes for sale at the end of February dropped to 471,000, the fewest since July 2005, indicating builders are making headway in clearing out the inventory glut.

Still, the decline in sales kept supply at 9.8 months, the same as in January and the highest since 1981.

Elevated inventories are pushing down prices as builders struggle to unload homes they've already built. The median price fell 2.7 percent from February 2007 to $244,100.

`In a Pinch'

The durable-goods report also showed bookings for fabricated metals and automobiles dropped.

``There's a lot more economic uncertainty than we thought,'' Mark LaNeve, North American marketing chief for General Motors Corp., the world's largest automaker, said in a Bloomberg Television interview on March 19. ``With consumers in a pinch and some of the liquidity and credit issues we are experiencing in the economy, we are being more aggressive with incentives.''

A strike at auto-parts supplier American Axle & Manufacturing Holdings Inc. that has idled several automobile plants may also be contributing to the decline at vehicle makers. The four-week walkout has led to slowdowns at GM plants and at companies that supply parts and ship vehicles.

Manufacturing Weakness

Other factory surveys signal weakness. The Federal Reserve Bank of Philadelphia's index of business activity showed manufacturing contracted in March for the fourth month in a row. A similar measure from the New York Fed showed manufacturing shrank this month at the fastest pace since records began in 2001.

The Fed cut its main lending rate by three-quarters of a percentage point to 2.25 percent on March 18 in an attempt to prop up the faltering economy and restore faith in the U.S. financial system.

``Recent information indicates that the outlook for economic activity has weakened further,'' policy makers said in a statement after the meeting.

Manufacturers are getting help from growth in emerging markets. Terex Corp., the world's third-largest maker of construction equipment, is facing a record backlog in crane orders on surging overseas demand. The Westport, Connecticut- based company said it plans to expand facilities in China and India and expects to meet a goal of $12 billion in sales by 2010.

``Accelerated growth in developing markets'' is driving growth, Chief Executive Officer Ron DeFeo said at a trade show in Las Vegas on March 12. ``We're running as fast as we can to add as much capacity as we can.''