BUSINESS

Orders for US durable goods tumble 18.2 per cent in August, but business spending plans up

09/25/2014 08:39 EDT | Updated 11/25/2014 05:59 EST
WASHINGTON - Orders for long-lasting manufactured goods slumped in August as demand for commercial aircraft descended from record highs, but investment plans by businesses posted promising gains.

Durable goods orders fell 18.2 per cent in August following a 22.5 per cent jump in July, the Commerce Department reported Thursday. Both the big increase and the big drop were records. They reflected sharp swings in demand for commercial aircraft, an extremely volatile category that can skew overall results. Airplane orders fell 74.3 per cent in August.

More importantly, however, a key category that serves as a proxy for business spending plans rose 0.6 per cent.

The figure offers further evidence that manufacturing is a key source of strength for the economy this year. Economists expect businesses to boost spending as they expand and modernize their operations.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said that the plunge in overall orders simply reflected "a return to more normal orders for Boeing after their massive July jump."

Orders for motor vehicles and parts also fell, declining 6.4 per cent after a 10 per cent increase in July. The August dip was expected to be temporary given the strong sales gains automakers have enjoyed this year.

Excluding the volatile transportation category, orders would have risen 0.7 per cent in August after a 0.5 per cent drop in July.

Industries showing higher demand in August included machinery, up 0.7 per cent, and electrical equipment and appliances, which rose 3.1 per cent.

Paul Ashworth, chief U.S. economist at Capital Economics, said that the rise in core capital goods, the proxy for business investment, showed that business spending on equipment continued to expand at a healthy pace in the July-September quarter.

A separate report earlier from the Federal Reserve showed that manufacturing output fell 0.4 per cent in August, marking the first decline in seven months. The drop stemmed from a sharp downturn in production at auto plants, due mainly to seasonal adjustment issues.

Broad advances in manufacturing this year have pointed to stronger growth across the economy, suggesting that companies expect business investment and consumer spending to improve in the coming months.

A closely watched index compiled by the Institute for Supply Management showed that manufacturing rose to the highest level in more than three years. The ISM manufacturing gauge increased to 59 in August, the highest point since March 2011.

Factories are benefiting from robust demand for aircraft, furniture and steel. The strength in manufacturing has helped to offset a slowdown in home building. U.S. manufacturers, however, face challenges in some of their major export markets. The European economy is performing sluggishly, while slower growth in China has weighed on business activity in the world's No. 2 economy.

The U.S. economy, as measured by the gross domestic product, grew at a 4.2 per cent annual rate in the April-June quarter. It marked a significant rebound from the 2.1 per cent contraction in the first quarter that in part reflected a severe winter. That GDP figure will be revised for a final time on Friday, and many economists believe it will be adjusted higher to a growth rate of 4.6 per cent.

Economists expect that continued employment gains will spur consumer spending and translate into annual growth of around 3 per cent in the second half of this year.