Thursday, April 28, 2005

Drop in Durable Goods Orders Indicates Slowdown
Drop in Durable Goods Orders Indicates Slowdown

By Nell Henderson
Washington Post Staff Writer
Thursday, April 28, 2005; E01

New orders for big-ticket manufactured goods plunged in March at the steepest rate in more than two years, for a third consecutive monthly drop, the government reported yesterday, adding to other signs of a cooling economy.

The Commerce Department report undercut many analysts' expectations that rising business investment would provide more fuel for economic growth this year just as consumers started to slow their spending because of higher energy costs, rising interest rates, lagging wage growth and loads of debt.

The news also proved disappointing to those who had welcomed the surge in business spending late last year as a sign that the last missing piece of the economic recovery had fallen into place after three years of reluctance to hire and invest.

"There is no longer any question about the economy's sharp slowdown," said Charles W. McMillion, president of MBG Information Services, an economic analysis firm in the District. The report suggests "that the slowdown in spending by hard-pressed consumers is spreading to business investment."

The news is unlikely to change Federal Reserve officials' plans to raise their benchmark short-term interest rate again when they meet Tuesday, to 3 percent from 2.75 percent, to keep inflation contained.

But the weak report strengthens the hand of those Federal Reserve officials and staff who favor sticking to a gradual, or "measured," pace of rate increases and who are considering whether to leave rates unchanged at the Fed's following meeting in late June. By then, they will have economic data for April and May and will have a better sense of the strength of both economic growth and inflationary pressures.

New orders for durable goods expected to last at least three years, such as cars, appliances and aircraft, tumbled 2.8 percent in March, the biggest drop since September 2002, Commerce reported yesterday.

The department also revised its previous estimate for February from a gain to a drop of o.2 percent, which means new orders declined for three months in a row -- the first time that has happened since July through September of 2001, during the last recession.

The durable goods report yesterday added to others that have quickly altered Fed officials' sense of the economy's strength since their last meeting, March 22. They said then that the economy was growing at a "solid" pace and noted rising inflation pressures -- which many investors took as a warning that the Fed might raise rates more aggressively in coming months.

Since then, Fed officials and investors have learned that hiring, retail spending, consumer confidence and durable goods orders all fell last month and that the trade gap widened in February.

"The March decline was as broad as it was deep, with orders falling in machinery, computers, fabricated metals, motor vehicles and aircraft," noted David Huether, chief economist for the National Association of Manufacturers. "This signals that the overall pace of business investment is cooling."

Economists have blamed most of the consumer pullback on energy costs, which rose steeply in March through early April and have stabilized since. The national average price for gasoline rose to a high, not adjusted for inflation, of $2.28 for a gallon of regular by April 11 but had ebbed to $2.23 yesterday, according to AAA.

Fed officials have hoped that the economic slowdown would pass and inflation pressures would ease if energy prices stop rising.

"Most forecasters expect growth to remain solid," Fed Board member Donald L. Kohn said in a speech Friday.

But Kohn's comments also reflected his belief then that "business investment in capital equipment has surged" recently.

Instead, the Commerce report showed that a category called core capital goods, which excludes aircraft and is considered a reliable guide to business investment, fell by 7 percent from January to March, said Paul Ashworth, senior international economist for Capital Economics Ltd., in an analysis for clients. That almost wiped out the 7.9 percent jump from November to January, he said.

The slide in durable goods orders "is a particular concern because with higher energy prices hitting [consumer spending] in the second quarter, we were looking for business investment to drive growth," Ashworth said. "Unfortunately, these figures suggest investment too may be faltering."

Economists debated the reasons for the falloff in investment. Huether, of NAM, blamed congressional inaction on a number of issues for creating uncertainties for business.

"Uncertainty about many key policies that impact economic growth -- energy prices, legal reform, Social Security reform, soaring health care costs, trade issues, tax policy -- are keeping investors on the sidelines," Huether said.

Other economists attributed the pullback to the same forces affecting consumers -- rising interest rates and energy costs.

John Silvia, chief economist of Wachovia Securities, said the numbers reflect the decision of many companies to invest in China and elsewhere abroad rather than in the United States.

Many analysts had expected the economy to slow this year, after several years in which growth was pumped up by tax cuts and super-low interest rates. With high energy prices adding another drag, Silvia is forecasting the economy to grow around 3 percent this year, down from 4.4 percent last year.