Factory orders dropped 2.4 per cent in July compared with June, when orders rose 1.6 per cent, the Commerce Department reported Thursday.
Orders for core capital goods, a category viewed as a proxy for business investment spending, fell 4 per cent in July.
Core capital goods are considered a good measure of businesses' confidence in the economy. They include items that point to expansion — such as machinery, computers and heavy trucks — while excluding volatile orders for aircraft and defence. The July setback was expected to be temporary.
Orders for durable goods, items expected to last at least three years, declined 7.4 per cent, a slightly bigger drop than the 7.3 per cent fall estimated in a preliminary report last week. It was the biggest decline since a 12.9 per cent fall in August 2012. Orders for nondurable goods, items such as chemicals, food and paper, rose 2.4 per cent in July after a 0.5 per cent decline in June.
Excluding the volatile transportation category, factory goods orders were up 1.2 per cent.
The big drop in core capital goods orders suggests the third quarter is off to a weaker start than some had hoped. While economists cautioned that it's just one month of data, a few lowered their growth estimates for the July-September quarter after seeing the durable goods report. Some believe that growth may only come in around 1.9 per cent for the current quarter, a drop from previous estimates of 2.5 per cent growth.
Overall manufacturing has slumped this year, hurt by weakness overseas that has dragged on U.S. exports. But there have been signs that factory activity could pick up in the second half of the year.
But the Institute for Supply Management reported Tuesday that its closely watched gauge of manufacturing activity rose in August to a reading of 55.7, up from 55.4 in July. That was the highest level since June 2011 and offered encouragement that manufacturing may be starting to pull out of its slowdown.
The economy expanded at an annual rate of 2.5 per cent in the April-June quarter.