Bloomberg News

U.S. Economy: Durable Goods Orders Help Sustain Expansion

October 26, 2011

(Updates with closing markets in fifth paragraph.)

Oct. 26 (Bloomberg) -- Orders for U.S. durable goods other than transportation gear rose in September by the most in six months, indicating manufacturing will help sustain an economy hobbled by 9.1 percent unemployment.

Demand for goods meant to last at least three years, excluding airplanes and automobiles, climbed 1.7 percent, according to figures from the Commerce Department issued today in Washington. Another report from the department showed purchases of new homes rose more than forecast.

A government tax break aimed at spurring business investment coupled with a 14 percent drop in the value of the dollar since June 2010 that is propelling American exports to record levels may keep boosting sales at manufacturers like Caterpillar Inc. A report tomorrow may show gross domestic product expanded at a 2.5 percent annual pace in the third quarter, the most in a year.

“The manufacturing sector remains healthy,” said Neil Dutta, an economist at Bank of America Corp. in New York. “This story will continue because of a weak dollar, lots of cash and low financing costs, the combination of which makes it more attractive for businesses to expand through stronger investment. Tomorrow’s GDP number will get a strong contribution from capital spending and trade.”

Stocks gained after the reports and as Europe reached an agreement on plans to recapitalize banks. The Standard & Poor’s 500 Index climbed 1.1 percent to 1,242 at the close in New York. The yield on the benchmark 10-year note rose to 2.21 percent from 2.11 percent late yesterday.

Aircraft Orders

Total bookings for durable goods fell 0.8 percent, depressed by a 26 percent plunge in demand for aircraft that followed a 25 percent jump the prior month.

The median forecast of 79 economists surveyed by Bloomberg News projected a 1 percent decrease in total orders after a 0.1 percent decline in August. Estimates ranged from a drop of 2.5 percent to a gain of 1 percent.

Excluding transportation equipment, bookings were projected to rise 0.4 percent, according to the survey median.

The biggest drop in prices in more than two years helped sales of new houses climb 5.7 percent to a 313,000 annual pace, the most in five months, other figures from the Commerce Department showed.

The median price decreased 10 percent to $204,400 in September from $228,000 in the same month last year. The percentage drop was the biggest since April 2009.

Regional Differences

The increase in sales was paced by rising demand in the West and South, while other parts of the country slumped, showing an uneven market that is weighed down by competition from a glut of distressed, previously owned houses. Last month’s sales pace was weaker than the 323,000 new homes sold in all of 2010, the worst annual performance in records dating to 1963.

Housing is “likely to remain in the doldrums until the overhang of existing homes is worked down,” John Ryding, chief economist at RDQ Economics in New York, said in a note to clients. “We do not see housing making a meaningful contribution to growth over the next year.”

The manufacturing report showed orders for non-defense capital goods excluding aircraft, a proxy for business investment in items such as computers and engines, climbed 2.4 percent, the most since March.

Shipments of those goods, used in calculating GDP, fell 0.9 percent after a 3.1 percent gain in August that was larger than previously estimated. For the third quarter, sales jumped at a 17 percent annualized rate compared with an 11 percent increase in the previous three months, indicating business investment picked up.

Growth Pickup

The median forecast for tomorrow’s third-quarter GDP figure would follow a 1.3 percent pace of growth in the previous three months.

Today’s figures also showed companies were keeping a tight rein on inventories, which may limit last quarter’s projected gain in business spending. Durable-goods stockpiles climbed 0.1 percent in September, the smallest gain since a decline in December 2009.

Other indicators have shown manufacturing, which accounts for about 12 percent of the economy, continues to grow. The Institute for Supply Management’s factory index climbed to 51.6 last month from 50.6 in August. A level greater than 50 signals expansion. Industrial production advanced in September on growing demand for automobiles and computers, according to figures from the Federal Reserve.

Caterpillar Orders

While the European debt crisis and the sluggish U.S. expansion threaten to curb demand, the potential drags on growth don’t “signal the onset of recession,” Caterpillar said in an Oct. 24 statement. The world economy will expand 3 percent in 2011 and 3.5 percent in 2012, according to the Peoria, Illinois- based company.

“Although there is a good deal of economic and political uncertainty in the world, we are not seeing it much in our business at this point,” Doug Oberhelman, chairman and chief executive officer, said in a statement. Caterpillar, the world’s largest construction and mining-equipment maker, posted third- quarter profit and sales that topped analysts’ estimates as demand for shovels and drills used to dig up metals rose.

A cheaper dollar, by making American goods more competitive overseas, is helping bolster demand. IntercontinentalExchange Inc.’s Dollar Index, which tracks the currency against those of six major trading partners including the euro, yen and pound, has dropped 14 percent since June 7, 2010. July and August were the best month for U.S. exports on record, according to figures from the Commerce Department.

A rush to qualify for a larger government credit may also be contributing to an increase in businesses investment. The Obama administration’s tax compromise allows companies to depreciate 100 percent of investment in capital outlays in 2011 and 50 percent in 2012.

--With assistance from Bob Willis and Chris Middleton in Washington. Editors: Carlos Torres, Vince Golle

To contact the reporter on this story: Alex Kowalski in Washington at akowalski13@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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