Thursday, June 28, 2007

US durable goods orders slip

US durable goods orders slip
By Daniel Pimlott in New York
Copyright The Financial Times Limited 2007
Published: June 27 2007 14:59 | Last updated: June 27 2007 14:59

Durable goods orders dropped in May, adding to fears about the health of the US business investment following a series of reports that showed the housing downturn is far from over.

New orders for durable goods fell a larger than expected 2.8 per cent as aircraft orders went into tailspin. But even excluding the volatile orders for transportation equipment, orders surprised economists by falling 1 per cent, the first decline since January and well below a predicted 0.2 per cent gain.

The weakness, concentrated in machinery, metals and electronics, raises some doubt over the anticipated upturn in business investment as well as predictions of higher second quarter US economic growth.

Non-defence capital goods excluding aircraft, seen as representative of business spending fell 3 per cent, the biggest drop since January.

“With recent indications that corporate profits are slowing, weaker capital spending by businesses appears to be in prospect, reinforcing softer US economic growth,” said Peter Kretzmer, an economist at Bank of America Securities.

In the first quarter the US economy grew by 1.3 per cent, its slowest pace in four years.

This week’s data have shown that sales of existing homes and newly built homes dropped last month, and that prices for many homes are still falling. Lennar, the second largest homebuilder in the US, warned that further price drops will be necessary to clear the build up of unsold homes, and start the recovery in housing.

The unsettling housing news comes as the markets have been troubled by ongoing fall-out from the crisis in subprime mortgages, contributing to increased borrowing costs.

Many economists had neverheless predicted that the second quarter would show a marked improvement from the first quarter, after the rundown in manufacturing inventories and the housing slowdown have recovered from their low points earlier in the year.

“Our perspective is that the May declines represent a pullback that is consistent with an ongoing recovery rather than weakness,” said John Ryding, chief US economist at Bear Stearns. Because of the volatility of the durable goods numbers, which tend to be moved by big one off orders, Mr Ryding said it was better to look at the numbers on a quarterly basis. Over the quarter, durable goods orders had risen 16.5 per cent, compared with a 9 per cent decline in the first quarter, he said.

The Federal Reserve has been predicting a pick-up in growth later this year. On Thursday the Fed’s Open Markets Committee will reveal its latest decision on interest rates. It is expected to keep them on hold at 5.25 per cent.

“This data point toward a modest downward adjustment to GDP relative to expectations but not one of enough significance to warrant altering our forecast for 3.7 per cent GDP growth in the second quarter,” said Drew Matus, an economist at Lehman Brothers.


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