Orders to U.S. factories fell in January by the most in five months, weighed down by a slump in demand for military hardware and commercial aircraft.
Bookings dropped 2% after a revised 1.3% increase in December, Commerce Department data showed today in Washington. Economists projected a 2.2% decline, according to the median forecast in a Bloomberg survey. Demand for durable goods decreased 4.9%, little changed from the 5.2% drop estimated last week, while non-durables climbed 0.6% on gains in petroleum and chemicals.
The biggest jump in machinery including construction equipment and generators in almost five years is helping boost manufacturing. A pickup in business spending indicates companies are looking beyond the fiscal-policy battles in Washington as sales improve.
“Manufacturing is looking a bit stronger than it was in the second half of last year,” Robert Mellman, senior economist at JPMorgan Chase & Co. in New York, said before the report. “Housing is going gangbusters, other parts of the economy are doing better, and the inventory cycle has turned positive. Foreign demand in some places might start to pick up.”
Estimates of 63 economists ranged from declines of 0.5% to 4.5%. The Commerce Department revised the December figure from an initially estimated 1.8% gain.
Excluding transportation equipment, factory orders rose 1.3% in January after a 0.1% drop the prior month. Boeing Co., the Chicago-based aerospace company, said it received two orders in January, down from 183 the prior month. Boeing is contending with safety concerns related to batteries on its 787 Dreamliner.
Orders for military capital goods slumped 69.7% after jumping 107.2% in December, today’s report showed. Excluding defense, bookings rose 0.3% in January after declining 0.2% the prior month.
While these orders are volatile month to month, they highlight the risk that across-the-board federal budget cuts, known as sequestration, represent for the world’s largest economy. About $1.2 trillion in reductions over the next decade began taking effect at the start of March.
Orders for capital goods excluding aircraft and military equipment, a measure of future business investment, advanced 7.2%, the biggest gain since September 2004, after falling 0.8% in December. The gain was revised up from the 6.3% increase reported in last week’s durable goods report.
Shipments of such equipment, which are used in calculating gross domestic product, decreased 1.1% after a 0.1% gain the prior month.
Orders for machinery climbed 15.6% in January, led by a 57.3% gain in construction gear that was the biggest since September 2011.
Factory inventories increased 0.5% in January, and manufacturers had enough goods on hand to last 1.28 months at the current sales pace, compared with 1.27 months in December.
Along with sequestration, on Jan. 1, Congress allowed the payroll tax that funds Social Security to rise to 6.2% from 4.2 and allowed taxes on top income earners to rise. While retail sales have not yet declined in the wake of the higher levies, future weakness could limit gains in manufacturing.
Demand from businesses, nonetheless, looks to be holding up. Business investment was a bright spot last quarter as spending on equipment and software grew at an 11.3% rate, the fastest in more than a year. Depleted inventories may also signal a first-quarter pickup in production.
American factories expanded in February at the fastest pace in almost two years, according to the Institute for Supply Management’s factory index. The gauge rose to 54.2, the highest reading since June 2011, the Tempe, Arizona-based group said March 1. Readings greater than 50 signal expansion.
“From where we sit today, we feel like most of the excess inventory has been worked out,” Craig Arnold, chief operating officer of industrial equipment maker Eaton Corp., said during a March 1 analyst conference. “Our underlying demand is matching retail sales. We’re optimistic that at this point to the extent that we see real underlying demand in the market that we once again see a multiple of that as it impacts our businesses.”
To ensure the expansion maintains traction, Federal Reserve policy makers have pursued unprecedented monetary easing. Fed Chairman Ben S. Bernanke last month, testifying before the Senate Banking Committee, defended the Fed’s $85 billion a month in asset purchases and near-zero target interest rate, saying that “monetary policy is providing important support to the recovery.”
“Notably, keeping longer-term interest rates low has helped spark recovery in the housing market and led to increased sales and production of automobiles and other durable goods,” he said.