WASHINGTON – Businesses cut back sharply on their orders for long-lasting manufactured goods in December with a key category that signals business investment plans falling by the biggest amount in five months.
Orders for durable goods fell 4.3 per cent in December compared with November, when orders had risen 2.6 per cent, the Commerce Department reported Tuesday. The weakness was led by a big 17.5 per cent drop in the volatile category of commercial aircraft.
There was widespread weakness in a number of categories including a 1.3 per cent decline in demand for non-defence capital goods excluding aircraft. This category is viewed as a proxy for business investment plans.
Some of the December weakness probably reflected a temporary dip following November’s big jump which had been driven by businesses rushing to take advantage of expiring tax breaks.
The December decline came as a surprise to economists. The consensus view among economists was that orders would post a moderate rise reflecting what they believe is an improving outlook for U.S. manufacturers.
Jennifer Lee, senior economist at BMO Capital Markets, said that a good portion of the decline in commercial aircraft orders resulted from the government’s seasonal adjustment process which trimmed a tripling in demand for airplanes that Boeing reported for the month.
She said demand should rebound in coming months although it appeared that businesses were proceeding with caution at the moment.
In addition to the big drop in orders for commercial aircraft, orders for motor vehicles and parts fell 5.8 per cent. That was likely a temporary dip given the strong sales that automakers are enjoying.
Orders for primary metals such as steel fell 2.1 per cent while demand for computers and other electronic products dropped 7.8 per cent. Orders for machinery rose 0.8 per cent.
A key gauge of manufacturing activity remained near a 2 1/2 year high in December. The Institute for Supply Management said its manufacturing index registered 57 in December, only slightly down from a 57.3 reading in November. The December level was still the second-highest reading since April 2011. Any reading above 50 signals growth in manufacturing.
Consumers are buying more autos and houses, boosting demand for such items as steel, furniture and other manufactured goods.
The ISM’s manufacturing index had increased for six straight months through November. In a good sign for the future, a measure of new orders in the ISM rose in December to the highest level since June 2011.
Economists are hoping that 2014 will mark a turning point for an economy that has performed at sub-par rates for much of the time since the recession ended in June 2009. Many analysts are forecasting the economy will grow by around 3 per cent in 2014, up by a full percentage point from 2013.
Much of the hope for a better 2014 reflects a belief that the federal government will be less of a drag this year. In 2013, higher taxes and across-the-board spending cuts trimmed about 1.5 percentage points from growth.
U.S. manufacturers are also being helped by an improving outlook in many overseas markets. Europe’s economy is picking up slightly after a long recession.
The rising economic strength is giving the Federal Reserve the leeway to scale back slightly on its support programs. The Fed in December announced it was trimming a monthly bond buying program from $85 billion to $75 billion and indicated it would make further cuts at upcoming meetings if the economy and labour market continue to improve. The bond purchases were aimed at pushing long-term interest rates lower as a way to stimulate greater economic activity.
The Fed is holding its first meeting of 2014 on Tuesday and Wednesday. It will be the last time Federal Reserve Chairman Ben Bernanke will preside. He is stepping down at the close of business on Friday and will be succeeded by Fed Vice Chair Janet Yellen.