Factory data signals further slowdown in GDP growth

April 4, 2016 11:01 AM

New orders for U.S. factory goods fell in February and business spending on capital goods was much weaker than initially thought, the latest indications that economic growth slowed further in the first quarter.

The Commerce Department said on Monday new orders for manufactured goods declined 1.7% as demand fell broadly, reversing January's downwardly revised 1.2% increase. Orders have declined in 14 of the last 19 months. They were previously reported to have increased 1.6% in January.

The report added to weak consumer spending and trade data in suggesting economic growth moderated further at the turn of the year after slowing to a 1.4% annualized pace in the fourth quarter. Estimates for first-quarter gross domestic product growth are currently below a 1% rate.

Prices of U.S. Treasuries were trading higher after the data, while U.S. stocks were largely unchanged. The dollar was slightly weaker against a basket of currencies.

Manufacturing, which accounts for about 12% of the economy, has been pressured by a strong dollar and weak global demand, which have undermined exports of factory goods, as well as efforts by businesses to reduce an inventory overhang.

The sector has also been slammed by investment cuts by energy firms as they adjust to reduced profits from cheap oil.

But the worst of the factory slump appears to be over, with a survey last week showing manufacturing activity expanded in March for the first time in six months.

After gaining about 20% vs. the currencies of the United States' main trading partners between June 2014 and December 2015, the greenback is flat on a trade-weighted basis so far this year. In addition, the slide in oil prices has slowed.

In February, factory orders fell broadly, with orders for transportation equipment tumbling 6.2%. Orders for machinery dropped 3.4% and bookings for electrical equipment, appliances and components decreased 3.6%.

The Commerce Department also said orders for non-defense capital goods excluding aircraft - seen as a measure of business confidence and spending plans – fell by a steeper 2.5% in February instead of the 1.8% drop reported last month.

Shipments of these so-called core capital goods, which are used to calculate business equipment spending in the GDP report, fell 1.7% in February and not 1.1% as previously reported.

Inventories of factory goods dropped for an eighth straight month, suggesting factories were making progress in reducing the inventory glut. While that could support future manufacturing production, it suggests inventories will again be a drag on economic growth in the first quarter.

Weak core capital goods shipments and declining factory inventories could prompt economists to trim their first-quarter GDP growth estimates.

The inventories-to-shipments ratio was 1.37 in February, unchanged from the prior month. Unfilled orders at factories fell 0.3% in February, while shipments of manufactured goods, which have declined in 10 of the last 11 months, fell 0.7%.

About the Author