Durable Goods Orders Plunge 10.5% : Economy: Steep drops in the aircraft and auto sectors in January gave the key gauge of industrial growth its largest single-month decline.
WASHINGTON — Orders for durable manufactured goods plunged 10.5% in January, the worst showing on record, as a post-strike surge in aircraft orders subsided and auto production sagged, the government said Tuesday.
Although the Commerce Department’s estimate of orders for goods is subject to wild swings from month to month, the steep January decline reinforces earlier indications of a continuing slump in the nation’s manufacturing sector.
“This waves a red flag at what is an ongoing downturn in the industrial sector, which has been going on for about 10 months and doesn’t seem likely to revive any time soon,†said Allen Sinai, chief economist with the Boston Co.
“The bright spot is that manufacturing is now a relatively small part of the economy, so this doesn’t spell recession for the economy as a whole,†he said. “But we can’t go on excusing reports like this with special factors.â€
If not subsequently revised, the January plunge would be the largest single-month decline in durable goods orders since the Commerce Department began recording them in 1958. The only month that has come close to January was February, 1982, during a recession, when orders fell 9.2%.
Most economists viewed the slump without alarm, however, even though the consensus forecast had been that production would decline about 3.5%. Wall Street mostly ignored the report, with the Dow Jones industrial average gaining 14.64 points for the day.
January’s sharp drop in auto production already was common knowledge, and the correction from abnormally high aircraft orders after settlement of a Boeing Co. strike in November was widely anticipated. Together, the two categories contributed to a huge 27.6% decline in new orders for transportation equipment in January.
Federal Reserve Board Chairman Alan Greenspan told Congress that the sharp January drop was surprising, but not alarming, noting that orders for durable goods vary greatly from month to month.
“Other data that we have suggest that the order pattern is soft, but by no means accumulating on the downside,†Greenspan said in testimony before the Senate Finance Committee.
White House spokesman Marlin Fitzwater said the drop “probably indicates a slowing in the economy.†For the balance of the year, however, “we nevertheless expect moderate growth with low inflation,†Fitzwater said.
Giulio Martini, an economist with the investment firm of Sanford C. Bernstein & Co. in New York, nevertheless attributed much of the decline to special factors similar to the aircraft situation. “This is not nearly as bad as it looks,†he said.
One special factor, which may occur with regularity as a result of declining Pentagon budgets, was a 36.7% drop in defense capital goods orders. New orders for non-defense business equipment, normally a good indicator of capital investment in manufacturing, fell 13.7%.
“If you take out the military orders decline and discount the aircraft and the autos, it’s pretty much where we thought it would be,†Martini said.
Another big decline was recorded in orders for electrical machinery, down 17.6%. Commerce Department statisticians attributed virtually all of the drop to a sharp reduction in orders for communications equipment, an industry particularly affected by declining defense spending.
Lynn Reaser, an analyst with First Interstate Bancorp in Los Angeles, concluded that “the overall picture is one of general weakness in manufacturing.†Even so, she said, the January decline reflects many one-time events.
“Part of this is explained by big declines in defense and commercial aircraft orders from very high levels at the end of 1989,†Reaser said. “The aircraft industry is still strong but not sustainable at those (post-strike) levels, while the trend on defense spending is down--but not so steep as this report suggests. A lot of these month-to-month changes are not indicative of longer-term trends.â€
But Sinai, the Boston Co. economist, saw some ominous signs in the report.
“It’s tempting to downplay this big decline because of special factors, and it’s true that the data overstated aircraft, which will bounce back,†he said. “But defense orders, part of a longer-term spending downtrend, will not bounce back.
“The auto industry, given sales in February, is unlikely to bounce back. And with the massive profits squeeze on many manufacturing industries, capital equipment orders are not going to bounce back.â€
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