Markets & Finance

Manufacturing: Where's the Slowdown?


An export-driven jump in U.S. durable goods orders for July confounds economists' expectations of weakness

By BusinessWeek, Standard & Poor's, and Action Economics staff

The U.S. factory sector appears to have weathered the summer months in better shape than economists had expected, based on a report on orders for durable manufactured goods for July released Aug. 27.

Orders rose 1.3% in July, matching the increase seen in June. The July jump was much better than the 0.1% increase expected by economists. Strength was widespread, with solid gains in defense, transportation equipment, primary metals, and computers and electronic products shipments.

"The gains extended a general overperformance of these measures since March despite an ongoing assumption that business investment will eventually cooperate with the recession scenario," wrote Action Economics analysts on Aug. 27.

The July rise came in spite of a 25.7% drop in defense orders (after a 1.50% June increase). Civilian aircraft orders rebounded 28.0% after dropping 21.3% in June. Aircraft orders have continued to defy fears that soaring energy prices would cap new orders and prompt sizable cancellations, which have yet to materialize.

"Stronger Than Expected"

Orders for nondefense capital goods excluding aircraft, the key indicator for capital spending, rose 2.6% after a 1.3% June increase. Durable shipments, a more stable indicator than orders, jumped 2.5% in July after a 0.9% June rise. Inventories increased 0.8%, which left the inventory-to-sales ratio at 1.54 from a revised 1.56 in June.

"The data are much stronger than expected for manufacturing, probably showing continued strong export demand," says S&P senior economist Beth Ann Bovino.

"The resilience of capital goods spending in face of tight credit conditions, a poor growth outlook, and declining business confidence continues to surprise," wrote Lehman Brothers (LEH) economist Zach Pandl in an Aug. 27 note. "In our view, relatively healthy growth abroad and the competitive value of the dollar are driving demand for U.S.-made capital goods.… If correct, the recent downturn in growth abroad and stabilization in the dollar could put pressure on capital goods spending in the months ahead."

"Manufacturing continues to do remarkably well given the weakness in the labor market and stresses in the financial system, and it likely continues to benefit from overseas growth," wrote John Ryding, an economist for RDQ Economics. "However, this does not indicate strength in the overall economy, and we do not see the Fed hiking rates in the second half of the year."


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