Orders to U.S. Factories Decreased in October for Second Month

American factories received fewer orders in October for a second month, led by diminished demand for aircraft and business equipment as fears of a global economic slowdown impeded manufacturers.

Bookings for factory goods fell 0.4 percent, more than forecast, after a revised 0.1 percent drop in September that was previously estimated as a gain, according to data from the Commerce Department today in Washington. Inventories showed the biggest gain in six months.

Anticipation of a stumbling world economic expansion should Europe’s financial strain trigger a recession probably curbed manufacturers in the short run. Other reports have shown stronger equipment sales, export demand, and consumer spending during the holidays alongside leaner inventories, which are laying the groundwork for a production pick up to rebuild stockpiles.

“Manufacturing is in a pretty good recovery right now,” John Herrmann, a senior fixed-income strategist at State Street Global Markets in Boston, said before the report. “The only thing that held it back was the uncertainty over the course of the summer, from everything from gas prices, to the debt-ceiling debate and the euro crisis.”

Economists forecast factory orders would fall 0.3 percent, according to the median of 63 projections in a Bloomberg News survey. Estimates ranged from declines of 1.1 percent to gains of 0.8 percent. September was previously reported as a 0.3 percent increase.

Durable Goods

Orders for goods meant to least at least three years decreased 0.5 percent, less than the 0.7 percent decrease estimated by the government Nov. 23.

Orders for capital goods excluding aircraft and military equipment, a measure of future business investment, fell 0.8 percent compared with the 1.8 percent slump previously estimated. The increase in September was also revised up from 0.9 percent to 1.4 percent.

Shipments of such equipment, which are used in calculating gross domestic product, dropped 0.1 percent after a 0.5 percent decrease in September. Those readings were revised up from decreases of 1.1 percent and 1 percent previously estimated.

Bookings for non-durable goods, including petroleum and chemicals, fell 0.3 percent, today’s report showed.

Inventories climbed 0.9 percent in October, the biggest gain since April, indicating factories were already ramping up production to restock warehouses. Manufacturers had enough goods on hand to last 1.33 months at the current sales pace, the same as in the prior month.

European Crisis

Fears of a global economic retrenchment, which may have caused businesses to cut orders to U.S. factories, were underscored last week when six central banks led by the Federal Reserve lowered banks’ emergency funding costs to ease Europe’s sovereign-debt crisis. A Chinese purchasing managers’ index also dropped in November to the weakest level since February 2009, and a separate report showed an industrial slump in Australia.

Those concerns were offset by other indications U.S. manufacturing was weathering the turmoil. The Institute for Supply Management’s factory index increased to 52.7 in November, the fastest in five months, while its measure of orders and production grew at the fastest pace since April. Additionally, four of the six largest automakers by U.S. business beat expectations, boosting industry sales to a 13.6 million seasonally adjusted annualized rate, according to Autodata Corp.

“We’re encouraged by the industry’s recent performance and the developments that we’ve seen in the economy,” Don Johnson, vice president of U.S. sales at General Motors Co. (GM), said in a conference call with reporters last week. He cited gains in consumer confidence as supporting continued growth.

Business Investment

Factory output may maintain growth as an approaching deadline to qualify for a larger government tax credit drives an increase in businesses demand for equipment, In addition, a dollar that lost 11 percent of its value from June 2010 through Dec. 2 as tracked by IntercontinentalExchange Inc.’s Dollar Index (DXY) has made American goods cheaper abroad.

“Manufacturing activity grew at a steady pace across most of the country, with all districts other than St. Louis reporting increases in orders, shipments, or production,” the Federal Reserve said in its Beige Book survey released Nov. 30. The overall economy expanded at a “moderate” pace, according to the report, which covers activity from October to November.

To contact the reporter on this story: Alex Kowalski in Washington at akowalski13@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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