Bloomberg News

Slowdown Concern Ebbs on Durable Goods, U.S. Home Sales

June 27, 2012

Slowdown Concern Ebbs on Durable Goods, U.S. Home Sales

The increase in demand for U.S. durable goods followed a revised 0.2 percent drop in April that was previously reported as little changed.Photographer: Daniel Acker/Bloomberg

Orders for durable goods and the number of Americans signing contracts to buy an existing home rebounded in May, easing concern the world’s largest economy is faltering.

Bookings for goods meant to last at least three years rose 1.1 percent, the first increase since February, a Commerce Department report showed today in Washington. Pending home sales climbed 5.9 percent after slumping 5.5 percent in April, according to data from the National Association of Realtors.

Stocks rallied as the figures indicated manufacturing, a mainstay of the economy, was holding up amid a global economic slowdown that’s curbing demand for exports and hurting sales at companies like Joy Global Inc. (JOY:US) Housing, the industry that triggered the recession, may keep improving as record-low mortgage rates spark buyer interest.

“The economy is growing, but it’s still muddling through,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, who forecast a gain in durables orders and pending home sales. “Concerns about the collapse of manufacturing are grossly overblown. We’re in a housing recovery.”

The Standard & Poor’s 500 Index rose 0.9 percent to 1,331.85 at the close in New York. The yield on the benchmark 10-year Treasury note was little changed at 1.63 percent, the same as late yesterday.

Elsewhere today, Britons repaid more mortgage debt than they borrowed in May for the first time in at least 15 years as consumers sought to improve finances, the British Bankers’ Association reported.

Previous Slump

The increase in demand for U.S. durable goods followed a revised 0.2 percent drop in April that was previously reported as little changed. Orders fell 6.8 percent in the first four months of the year, the weakest stretch since the same period in 2009, during the recession.

“May looked OK, but the trend is still relatively soft,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “It’s soft, but it’s not collapsing.”

“Manufacturing is probably going to slow here” in the middle of the year, Feroli said.

The median forecast of 76 economists surveyed by Bloomberg News called for a 0.5 percent gain in durable-goods orders. Survey estimates ranged from a decline of 1.5 percent to an increase of 2 percent.

Orders for non-defense capital goods excluding aircraft climbed 1.6 percent after a 1.4 percent decline in the prior month. These bookings are considered a proxy for future business investment in items such as computers, engines and communications gear.

Capital Goods

Shipments of those capital goods, used in calculating gross domestic product, increased 0.4 percent after falling 1.5 percent the prior month.

“This comes as a relief that businesses aren’t completely cutting back,” said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto, who projected a 1 percent gain in orders. “We still have to be quite cautious as there is considerable uncertainty. U.S. growth will be moderate.”

The expiration at the end of 2011 of a tax incentive allowing 100 percent depreciation on equipment purchases may have prompted business investment to cool this year. The allowance for 2012 is 50 percent.

Joy Global, the maker of P&H and Joy mining equipment, cut forecasts for full-year earnings and revenue as mining companies ease capital expenditures amid concern over the slowdown in China. Its equipment orders fell 62 percent in the fiscal second quarter from a year earlier primarily due to a weak U.S. coal market, the Milwaukee-based company said.

Companies ‘Cautious’

“Even though there is upside to the current market conditions, the continuing uncertainty will keep mining companies cautious,” Mike Sutherlin, chief executive officer, said in a May 31 statement.

Some regional reports showed the slackening has spilled into this month. Manufacturing in the Philadelphia area shrank in June at the fastest pace in almost a year, while New York- region factories expanded at the slowest pace in seven months.

Meantime, housing is showing signs of stabilizing. Pending home sales provide insight into actual contract closings a month or two later. Purchases of existing homes, which made up about 93 percent of the housing market last year, are tabulated when the contract closes.

Today’s figures suggest sales of existing homes will rebound after a drop in May. Purchases declined 1.5 percent last month to a 4.55 million annual rate, the Realtors group said June 21.

Sales Peak

Existing-home sales have climbed since reaching a low of 3.39 million at an annual rate in July 2010. In the buildup to the subprime lending collapse and recession, sales reached a peak of 7.25 million in September 2005.

Compared with a year earlier, May pending sales of previously owned properties climbed 15.3 percent after a 14.7 percent April gain.

Contract signings climbed in all four regions, including a 14.5 percent jump in the West and a 6.3 percent increase the Midwest.

“This beleaguered sector is finally on the mend,” Millan Mulraine, a senior U.S. strategist at TD Securities in New York, said in an e-mail to clients. “On the surface, it points to a decent pop in existing home sales activity in June.”

Low borrowing costs continue to attract buyers. The average rate on a 30-year fixed mortgage dropped last week to 3.66 percent, the lowest since Freddie Mac began keeping records in 1972.

Builders like Lennar Corp. (LEN:US) are seeing improvement. The third-largest homebuilder by revenue said today it received orders for 4,481 homes in the three months through May from 3,204 a year earlier. The Miami-based builder’s backlog jumped 61 percent.

“The ‘for sale’ housing market has, in fact, bottomed,” Chief Executive Officer Stuart Miller said in a statement. “We have commenced a slow and steady recovery process.”

To contact the reporters on this story: Shobhana Chandra in Washington schandra1@bloomberg.net; Michelle Jamrisko in Washington at mjamrisko@bloomberg.net

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


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Companies Mentioned

  • JOY
    (Joy Global Inc)
    • $58.01 USD
    • -1.21
    • -2.09%
  • LEN
    (Lennar Corp)
    • $41.03 USD
    • -0.35
    • -0.85%
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