BUSINESS

US factory orders fell by record in August, dragged by aircraft volatility

10/02/2014 10:44 EDT | Updated 12/02/2014 05:59 EST
WASHINGTON - Orders to U.S. factories fell in August by the largest amount on record, but the drop was heavily weighed by an expected plunge in volatile aircraft orders.

A key category that tracks business investment plans posted a small increase, offering an encouraging sign that factory production will sustain momentum in the second half of this year.

Orders declined 10.1 per cent in August after a record increase of 10.5 per cent in July, the Commerce Department reported Thursday. Both months were affected by swings in demand for commercial aircraft, which soared in July only to plummet in August.

Core capital goods, a category seen as a proxy for business investment, managed to rise a slight 0.4 per cent in August after a 0.1 per cent July dip.

Economists expect businesses to boost spending as they expand and modernize their operations. Business investment was a key source of strength in the second quarter.

Orders for durable goods, items expected to last at least three years, fell a record 18.4 per cent in August. The figure reflected a 74.3 per cent drop in demand for commercial aircraft. Orders for motor vehicles and parts dropped 5.4 per cent, but that weakness was expected to be temporary given the robust sales automakers are experiencing this year.

Orders for non-durable goods, items such as chemicals, clothing and food, edged down 0.4 per cent in August following a 0.8 per cent July decline.

Excluding transportation, orders would have edged down a tiny 0.1 per cent in August. Demand for primary metals such as steel dropped 1.3 per cent, while orders for machinery managed a 0.9 per cent increase. Orders for computers dropped 15.2 per cent, but demand for electrical appliances rose 2 per cent.

On Wednesday, the Institute for Supply Management reported that its closely watched barometer of manufacturing performance fell to 56.6 in September from 59 in August. Analysts saw the slowdown as consistent with a recent drop-off in global demand and a rise in the value of the dollar, which makes American goods more expensive overseas.

Still, many economists believe manufacturing has enough momentum to keep the economy growing at a healthy rate above 3 per cent in the second half of this year.

The economy has been on a roller coaster so far this year. Gross domestic product contracted at an annual rate of 2.1 per cent in the first quarter, the result of a harsh winter that curtailed economic activity. Then pent-up demand by consumers and businesses drove growth to a rapid rate of 4.6 per cent in the April-June quarter.

Many economists are looking for more uniformity in the second half of the year, forecasting a rate above 3 per cent for both the third quarter and the October-December period. That would be a marked improvement from the sub-par growth rates of around 2 per cent that have been logged during the first five years of recovery from the worst recession since the 1930s.