Durable Goods Point to Second-Half U.S. Rebound: Economy

Orders for U.S. durable goods increased more than forecast in April, indicating the world’s largest economy will get a lift in the second half of the year as business investment strengthens.

Bookings for equipment meant to last at least three years increased 3.3 percent last month after dropping 5.9 percent in March, the Commerce Department said today in Washington. The median forecast from 78 economists surveyed by Bloomberg projected a 1.5 percent increase.

Gains in residential construction, growing demand for autos and the need to update equipment will probably ripple throughout manufacturing, helping the economy recover from a slowdown this quarter. At the same time, government cutbacks and cooling exports are restraining demand, which means the rebound will be slow to develop.

“This report is consistent with the economy continuing to recover, but just at a moderate pace,” said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida, and the second-best forecaster of capital goods orders over the past two years, according to data compiled by Bloomberg. “We’re not getting much demand from the rest of the world, but we are getting growth domestically.”

Stocks recovered from early losses as investors weighed prospects of improving economic growth against concern Federal Reserve policy makers will reduce record stimulus before the year is out. The Standard & Poor’s 500 Index fell less than 0.1 percent to 1,649.6 at the close in New York. It had been down as much as 0.8 percent.

Global Economy

Globally, German business confidence improved in May for the first time in three months, adding to signs Europe’s largest economy is picking up.

Estimates for April durable goods in the Bloomberg survey of economists ranged from a drop of 5.9 percent to a gain of 4.6 percent. The Commerce Department revised the March decline from a previously reported 6.9 percent drop.

The gain in bookings last month was boosted by a rebound in demand for commercial aircraft, which is often volatile. Aircraft orders climbed 18.1 percent in April after slumping 43 percent the prior month. Boeing Co., the Chicago-based aerospace company, said it received orders for 51 planes last month, up from 29 in March.

Excluding the transportation equipment component, orders climbed 1.3 percent, the first gain in three months.

Investment Outlook

Bookings for non-defense capital goods excluding aircraft, considered a proxy for future business investment in items such as computers, engines and communications gear, increased 1.2 percent after a 0.9 percent gain the prior month that was previously reported as a drop.

The figures used to calculate gross domestic product this quarter were less positive, indicating business investment is cooling. Shipments of non-defense capital goods excluding aircraft dropped 1.5 percent after increasing 0.5 percent.

Gains in inventories may help offset some of the softness in capital spending this quarter, limiting the damage to growth. Stockpiles climbed 0.4 percent in April after falling 0.1 percent the prior month, according to the report.

Economists at Morgan Stanley called it a “mixed” report and lowered their tracking estimate of economic growth this quarter to a 1.7 percent annualized rate from 1.9 percent on the softening in business investment. At the same time, the figures were “stronger on a forward-looking basis, adding to expectations for a second-half pickup,” economist Ted Wieseman wrote in a research note.

Second Half

The report signals Morgan Stanley’s 2.4 percent growth forecast on average in the last six months of 2013 “is too conservative and that the second half pickup will be more robust,” Wieseman said. The strength in orders, gains in homebuilding and announced increases in auto production all point to pickup in growth, he said.

Ford Motor Co. said on May 22 that it’s taking on more workers as increased demand prompts the second-largest U.S. automaker to add capacity to build 200,000 more vehicles annually in North America.

Dearborn, Michigan-based Ford said on May 2 that it will hire a third crew at its Claycomo, Missouri, plant to boost F-150 output starting in the third quarter, after F-Series U.S. sales rose 19 percent through April.

A pickup in manufacturing would stem a recent slowdown in inventory building that has curbed activity. The Institute for Supply Management’s manufacturing index declined in March and April, falling to just above the 50 level that represents the dividing line between contraction and expansion.

Growth Forecast

The U.S. economy probably cooled in the second quarter, according to economists surveyed by Bloomberg. Growth is projected at a 1.6 percent annualized rate, down from a 2.5 percent pace in the first three months of the year. GDP is estimated to grow at an average 2.4 percent pace in the second half of the year.

“We see indicators which point towards strengthening economies,” Louis Chenevert, chief executive officer of United Technologies Corp., said during an industry conference on May 21. Orders in the first quarter signal a rebound in the second half of the year, he said.

Chenevert said housing starts in the U.S. could increase 25 percent in 2013, European demand has shown signs of picking up and emerging markets have “good momentum.” Hartford, Connecticut-based United Technologies makes Carrier air conditioners, Pratt & Whitney jet engines and Otis elevators.

Obstacles Remain

Nonetheless, obstacles to even faster growth remain. The federal government is cutting outlays under the automatic budgets cuts known as sequestration, exports have cooled and American wage earners are trying to cope with an increase in the payroll tax.

Fed Chairman Ben S. Bernanke and some fellow policy makers have expressed concern the budget cuts are blunting the recovery. In testimony before Congress this week, Bernanke signaled central bankers will not taper record stimulus without what he called “real and sustainable” progress in reducing unemployment.