Durable-Goods Drop Imperils Outlook for U.S. GDP Pickup

Photographer: Tim Boyle/Bloomberg

A worker welds an aluminum case at the Aluminum Case Company, a division of MFZ Ventures, Inc., a privately held company established in 1946 that designs, engineers, and manufactures various types of aluminum cases, in Chicago, on August 22, 2013. Close

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Photographer: Tim Boyle/Bloomberg

A worker welds an aluminum case at the Aluminum Case Company, a division of MFZ Ventures, Inc., a privately held company established in 1946 that designs, engineers, and manufactures various types of aluminum cases, in Chicago, on August 22, 2013.

Orders for durable goods dropped in July by the most in almost a year, calling into question the strength of the projected pickup in U.S. growth.

Bookings (DGNOCHNG) for goods meant to last at least three years fell 7.3 percent, the first decrease in four months and the biggest since August 2012, the Commerce Department said today in Washington. The retreat was broad-based, with demand excluding the volatile transportation category unexpectedly falling.

The figures signal business investment was off to a slow start in the third quarter just as housing, a mainstay of the expansion, shows signs of cooling. Demand for military gear also declined last month, highlighting the risk that federal budget cuts will continue to slow the world’s biggest economy in the second half of the year.

“Growth will stay moderate,” said Michael Gapen, a senior U.S. economist in New York, at Barclays Plc, who forecast non-transportation orders would drop. “The fiscal drag will last longer.” Barclays cut its tracking estimate for growth this quarter to 1.9 percent from 2.1 percent after the report.

Stocks dropped after comments by Secretary of State John Kerry raised concern tensions in the Middle East will bubble over. Kerry said President Barack Obama will hold Syria’s government accountable for the “moral obscenity” of using chemical weapons.

Stocks Drop

The Standard & Poor’s 500 Index fell 0.4 percent to 1,656.78 at the close in New York, erasing earlier gains as investors speculated the disappointing durable-goods data may prompt Federal Reserve policy makers to take more measured steps in reducing how much monetary stimulus they pump into financial markets.

Elsewhere, sentiment may be picking up. Economic confidence in the euro area probably rose in August to the highest level in 17 months, adding to signs that the currency bloc’s recovery from a record-long recession is gathering pace, economists projected a report from the European Commission will show on Aug. 30.

The median forecast of 77 economists surveyed by Bloomberg called for a 4 percent drop in U.S. orders for durable goods. Estimates ranged from a drop of 8.2 percent to a 3 percent gain. Bookings rose 3.9 percent in June.

The median reflected a projected slump in demand for commercial aircraft that reflected previously released figures from Boeing Co. (BA) The Chicago-based plane maker had said it received orders for 90 aircraft in July, down from 287 the previous month.

Aircraft Bookings

Today’s figures showed bookings for commercial aircraft decreased 52.3 percent after climbing 33.8 percent in June.

The setback last month proved to be more broad-based than economists estimated with bookings also falling for items such as computers and appliances. Orders excluding transportation equipment declined 0.6 percent after a 0.1 percent gain in June.

Bookings for military equipment decreased 21.7 percent last month after a 28.7 percent jump in June.

Demand for non-defense capital goods excluding aircraft, a proxy for future business investment in computers, electronics and other equipment, fell 3.3 percent in July, the biggest decrease in five months. The drop followed consecutive gains since March, meaning the three-month average climbed to a 12.8 percent annualized pace from 8.9 percent in June, according to Bloomberg calculations.

Investment Outlook

Shipments of those products, a measure used in calculating gross domestic product, declined 1.5 percent after falling 0.8 percent in June. The setback indicates business investment was gaining little traction at the start of the third quarter.

Cisco Systems Inc. (CSCO), the biggest maker of networking equipment, said Aug. 14 that global sales have been weaker, prompting the company to announce plans to reduce its workforce by about 5 percent.

“Last quarter, I described a continued slow recovery, and I haven’t seen anything to suggest that this dynamic will change in the short term,” John Chambers, chairman and chief executive officer at San Jose, California-based Cisco, said on a conference call. “This recovery is more mixed and inconsistent than others I’ve seen.”

The U.S. economy grew at a 1.7 percent annualized rate in the second quarter after a 1.1 percent gain the prior three months, Commerce Department figures show. The economy has grown at an average 2.2 percent quarterly pace since the recession ended June 2009.

Growth Forecast

Growth is projected to pick up in the second half of the year, climbing 2.3 percent in the this quarter and 2.6 percent in the fourth quarter, according to the median estimate in a Bloomberg survey of economists from Aug. 2 to Aug. 6.

One of the bright spots in the report was a gain in demand for motor vehicles. Orders for automobiles and parts increased 0.5 percent after a 0.2 percent gain in June. Cars and light trucks sold at a 15.7 million annualized rate in July and 15.8 million the prior month, the strongest back-to-back readings since late 2007, according to figures from Ward’s Automotive Group.

In a sign production will be sustained, the backlog of orders to factories increased 0.4 percent in July after surging 2.1 percent. Unfilled orders for non-military capital goods excluding transportation equipment climbed 1.1 percent last month following a 1.8 percent advance.

Building Backlogs

“Either orders get canceled as the corporate sector loses confidence in recovery or the orders get filled as confidence continues to build,” Neil Dutta, head of U.S. economist at Renaissance Macro Research LLC in New York, said in a research note. “We are sticking with the latter.” Dutta lowered his tracking GDP forecast to 2.4 percent from 2.8 percent after today’s report.

Fed officials are considering when to start reining in $85 billion of monthly asset purchases that have swelled the central bank’s balance sheet to $3.65 trillion. At the Kansas City Fed’s annual symposium last week, central bankers rebuffed international calls to take the threat of fallout in emerging markets into account when tapering monetary stimulus.

Higher borrowing costs show signs of cooling the residential real estate market that has helped boost growth. Purchases of new U.S. homes plunged last month by the most since May 2010, Commerce Department data showed last week.

The interest rate on a 30-year fixed home loan climbed to 4.58 percent in the week ended Aug. 22, according to data compiled by Freddie Mac. The benchmark gauge for home financing rose from a record-low 3.31 percent in November and posted its biggest-ever quarterly gain of 25 percent from April to June.

To contact the reporter on this story: Michelle Jamrisko in Washington mjamrisko@bloomberg.net

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

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