BUSINESS

US durable goods orders fell in February as economy hit soft patch

03/25/2015 08:32 EDT | Updated 05/25/2015 05:59 EDT
WASHINGTON - Orders to U.S. factories for long-lasting manufactured goods fell in February, the latest installment of disappointing data this quarter that suggests the economy has hit a soft patch.

The weaker-than-expected performance is pushing economists to downgrade their growth forecasts for the January-March period. But they blame temporary factors for the slowdown, including severe snowstorms and West Coast port disruptions, and have brighter hopes for the spring.

The Commerce Department reported Wednesday that orders for durable goods dropped 1.4 per cent in February, disappointing economists who were looking for a small increase. The decline was the third drop in the past four months and January's increase, previously reported as a 2.8 per cent gain, was revised down to a more moderate 2 per cent.

The key category of core capital goods retreated 1.4 per cent, marking the sixth consecutive monthly decline in the sector, which serves as a proxy for business investment plans.

The weakness in February was widespread, with falling demand for commercial aircraft, autos and machinery. The result follows a slew of underwhelming results from recent economic indicators, such as three months of declines in retail sales to a big drop in home construction in February.

Michael Feroli, chief economist at JPMorgan Chase, on Wednesday lowered his forecast for growth in the January-March quarter to 1.5 per cent, down from 2 per cent previously.

But Feroli said he expects a rebound growth to rebound to 3 per cent in the second quarter and hit 2.7 per cent for the full year, up from last year's 2.4 per cent gain.

Many economists noted similarities to the start of 2014. A string of severe storms and other temporary setbacks dragged the economy into reverse, with gross domestic product contracting at an annual rate of 2.1 per cent in the first quarter. The economy is likely in better shape this year. Analysts say strong employment growth over the past year should lead to solid gains in consumer spending, which accounts for 70 per cent of economic activity.

"Despite the clear soft patch in quarter one, we expect a rebound... as consumer demand improves," said Bricklin Dwyer, an economics at BNP Paribas.

For February's durable goods report, transportation orders were down 3.5 per cent. Excluding transportation, durable goods orders dropped 0.4 per cent. Demand for machinery and computers fell, while orders for communications equipment and appliances rose.

Paul Ashworth, chief U.S. economist at Capital Economics, connected some of the weakness to the big plunge in energy prices, which has led to cutbacks in drilling plans by oil and gas companies. But he noted one sign of encouragement — private business surveys of investment spending plans have improved significantly in recent months.

"We would expect to see a rebound in equipment investment in the second quarter," Ashworth said.

Many economists are looking for manufacturing orders to start strengthening following a stretch of weakness in the second half of last year. They believe the end of harsh winter weather and the resolution of a labour dispute at West Coast ports, which caused supply disruptions, should help.

They expect strong consumer spending, powered by a year of healthy job gains, will boost domestic demand and help to offset global weakness and the strong dollar.

Growth in the overall economy slowed significantly in the October-December quarter, with a widening trade deficit trimming growth by more than a percentage point.

The government will release its third and final estimate of economic growth in the fourth quarter on Friday. Analysts expect growth will be revised slightly to a rate of 2.4 per cent, up from the previous estimate of 2.2 per cent. But that would still leave the economy expanding far below the 5 per cent rate in the third quarter. And economists believe growth has remained sluggish in the current January-March period at around 2 per cent.