Drop in Durables Orders Points to Slow Investment: Economy

Orders for durable goods dropped in October, pointing to a slowdown in U.S. business investment that will curb U.S. economic growth this quarter.

Bookings for goods meant to last at least three years decreased 2 percent after a 4.1 percent gain in September, the Commerce Department reported today in Washington. Other data, including a drop in jobless claims and unexpected increases in consumer sentiment and leading indicators, indicate any cooling in the expansion will be short-lived.

The federal shutdown last month and the prospect of more budget cuts have prompted companies such as Lockheed Martin Corp. to trim staff and close factories. At the same time, a rebound in household confidence heading into the holiday-shopping season combined with improving hiring prospects may brighten the outlook for retailers such as Macy’s Inc., which are discounting merchandise to boost sales.

“We are getting off to a slow start in the fourth quarter,” said Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, and the best forecaster of jobless claims over the past two years, according to data compiled by Bloomberg. The government shutdown “has kept policy uncertainty elevated, and uncertainty is a powerful disincentive to hire and invest.”

Figures from the Labor Department today showed fewer Americans filed applications for unemployment benefits last week, a sign that the labor market is showing resilience.

Fewer Claims

The number of jobless claims in the week ended Nov. 23 unexpectedly declined by 10,000 to 316,000, the fewest in two months, according to figures from the Labor Department. The median forecast of 44 economists surveyed by Bloomberg projected an increase to 330,000. Applications reflect weekly firings and typically wane before employment growth accelerates.

The economy added a more-than-forecast 204,000 jobs in October, according to figures from the Labor Department issued Nov. 8.

The Thomson Reuters/University of Michigan final index of consumer sentiment in November rose to 75.1 from 73.2 a month earlier, the group reported today. The median forecast of 65 economists surveyed by Bloomberg called for 73.1 after a preliminary reading of 72.

Stocks rose, extending a third monthly gain for the Standard & Poor’s 500 Index, as Hewlett-Packard Co. led a technology rally, while claims and confidence data boosted optimism in the economy. The S&P 500 advanced 0.3 percent to 1,807.23 at the close in New York.

U.K. Economy

While economists are optimistic U.S. growth will accelerate, the opposite is true in the U.K., where figures today showed the economy grew in the third quarter at the fastest pace in more than two years. Bank of England Governor Mark Carney has said that weak growth in the euro area may weigh on the outlook for U.K. exports.

The decline in U.S. orders for durable goods last month matched the median forecast of 79 economists surveyed by Bloomberg. Estimates ranged from a drop of 9.9 percent to a 1.2 percent advance.

Orders for aircraft, military gear and capital goods, such as machinery and computers declined last month, a sign the retreat was broad-based.

Bethesda, Maryland-based Lockheed Martin, the largest U.S. government contractor, said this month it will cut 4,000 jobs and close some operations in response to decreased federal spending, even after third-quarter profit rose 16 percent.

The Defense Department faces budget reductions of about $500 billion over a decade under the automatic cuts known as sequestration, including about $52 billion in the current fiscal year.

Cutting Jobs

“In the face of government budget cuts and an increasingly complex global security landscape, these actions are necessary for the future of our business and will position Lockheed Martin to better serve our customers,” Chief Executive Officer Marillyn Hewson said in a Nov. 14 statement.

Not all categories retreated last month as automobiles and electrical equipment and appliances showed gains.

The housing recovery has spurred demand for big-ticket goods such as appliances and furniture, benefiting companies including Benton Harbor, Michigan-based Whirlpool Corp.

“Every new home equates to about four new appliances and every existing-home sale equates to about two new appliances,” Larry Venturelli, chief financial officer at Whirlpool, said at a retail conference in New York on Nov. 20. “We are really in the third inning of growth within housing and this is a big demand driver for us going forward.”

Manufacturing Sentiment

The durable-goods report has been at odds with sentiment surveys among manufacturers. The MNI Chicago Report business barometer fell less than forecast in November, indicating factories continue to expand this month, other figures showed today. The group’s index declined to 63 from 65.9 a month earlier, the strongest back-to-back readings in more than two years. Numbers greater than 50 signal expansion.

The median projection in a Bloomberg survey of 55 economists was 60. Estimates ranged from 53.3 to 65. The index averaged 54.6 in 2012 and 62.8 in 2011.

Also today, the index of leading indicators rose in October for a fourth straight month, reflecting gains in factory orders and applications to begin new-home construction. The Conference Board’s gauge of the economic outlook for the next three to six months increased 0.2 percent after a 0.9 percent jump in September that was the biggest since March 2011, the New York-based group said today.

“Conditions for stronger growth are falling into place for early 2014,” said Moody’s Analytics’ Sweet. “Housing will kick in” and spur faster growth, he said.

Regaining Confidence

The rebound in the Michigan sentiment reading was confirmed by the weekly Bloomberg Consumer Comfort Index, which was also released today. The gauge increased to minus 33.7 in the period ended Nov. 24, the strongest in seven weeks, from minus 34.6.

Rising equity and home prices are bolstering household wealth and contributing to a pickup in attitudes just before the holiday-shopping season. The pace of wage and job growth will also influence whether consumers boost their spending, which accounts for almost 70 percent of the economy.

“I don’t think anybody’s going to be splurging, but you will see people out shopping and the season will be OK,” said Michelle Girard, chief U.S. economist at RBS Securities Inc. in Stamford, Connecticut. “We’re seeing employment growth of around 200,000 jobs a month. We’re seeing enough income growth to support a 2 percent consumer spending pace. It’s not great, but it’s sufficient.”

Retailer Discounting

Even with improved consumer fundamentals, retailers aren’t taking any chances. Ross Stores Inc., a discount designer-wear merchant, last week joined companies from Gap Inc. to Macy’s Inc. that have forecast a disappointing holiday-shopping quarter, citing heavy discounting and heightened competition.

The period between Thanksgiving and Christmas “will be the most intensely competitive and promotional selling period in recent years,” Ross Chief Executive Officer Michael Balmuth said in a Nov. 21 statement.

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