U.S. data points to slowing manufacturing activity

WASHINGTON Wed May 25, 2011 5:36pm BST

Workers place tires on the 2011 Ford Explorer and other vehicles at the Ford assembly plant in Chicago, Illinois, December 1, 2010. REUTERS/Frank Polich

Workers place tires on the 2011 Ford Explorer and other vehicles at the Ford assembly plant in Chicago, Illinois, December 1, 2010.

Credit: Reuters/Frank Polich

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WASHINGTON (Reuters) - New orders for U.S. manufactured goods posted their largest drop in six months in April after a steep fall in demand for transportation equipment, suggesting some cooling in factory activity.

Durable goods orders declined 3.6 percent last month, worse than economists' expectations for a 2.2 percent fall. March's orders were revised up to a 4.4 percent rise from a 4.1 percent increase, the Commerce Department said on Wednesday.

While durable goods orders are extremely volatile, the report added to a raft of recent data suggesting that the loss of economic growth momentum encountered as the year started persisted into the early part of the second quarter.

It also underscored the magnitude of the impact of supply chain disruptions from the Japanese earthquake on the economy.

"It is clear, not only from this report but from others, that the U.S. economy is encountering its fair share of speed bumps," said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto.

So far, data such as retail sales and industrial production have been generally lacklustre.

The weak durable goods report could prompt economists to lower their forecasts for second-quarter growth, currently ranging between 2.5 and 3.5 percent.

The government is expected to report on Thursday that the economy grew at a still sluggish 2.1 percent annual rate in the first quarter, according to a Reuters survey, rather than the 1.8 percent pace it estimated last month.

Orders last month were pulled down by a 4.5 percent fall in motor vehicle bookings, the largest decline since August, tracking an 8.9 percent dive in auto production during that month.

U.S. manufacturing contracted for the first time in 10 months in April as a result of supply chain disruptions in the wake of the March earthquake.

"The Japan factor is going be meaningful for second-quarter GDP," said Julia Coronado, chief North America economist at BNP Paribas in New York. "We are going to see a drawdown in inventories and we are going to see a slowdown in auto sales."

MANUFACTURING COOLING

Stocks on Wall Street opened lower on the data, but later recouped losses. U.S. Treasury debt prices fell modestly, while the dollar was little changed against a basket of currencies.

Also highlighting the economy's sluggish tone, the Federal Housing Finance Agency's home price index fell 0.3 percent in March from February. It declined 5.8 percent from a year ago.

Housing had remained on the margins on the recovery and Treasury Secretary Timothy Geithner saw little change.

"We've got several more years to go. Again just realistically I think it's going to take time still to heal that," Geithner told Politico in a live interview.

The economic recovery that started in the second half of 2009 has been led by the manufacturing sector.

But the durable goods data and a clutch of regional surveys are all pointing to a moderation, with most of the weakness concentrated in the motor vehicle production sector.

Orders were also weighed down by a 30 percent plunge in volatile aircraft bookings. Boeing took in just two aircraft orders, sharply down from the 98 it received in March, according to information posted on the plane maker's website.

But even excluding transportation, durable goods orders fell 1.5 percent after a 2.5 percent rise in March. There were declines almost across the board, with only orders for computers and electronic products bucking the trend.

A closely watched proxy for business spending -- nondefense capital goods orders excluding aircraft -- fell 2.6 percent last month after increasing 5.4 percent in March.

Shipments of nondefense capital goods orders excluding aircraft, which go into the calculation of gross domestic product, fell 1.7 percent. Inventories rose 0.9 percent after increasing 1.7 percent in March. Unfilled orders edged up 0.2 percent.

"The deceleration in inventory building in April is consistent with our downward revision of second-quarter GDP to 2.5 percent, in which we see inventories subtracting from growth this quarter," said Michael Feroli, an economist at JPMorgan in New York.

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