Durable Goods Orders Drop as US Shutdown Hurts Confidence

Orders for U.S. durable goods dropped in October, reflecting a broad-based retreat and signaling the government shutdown hurt business confidence.

Bookings for goods meant to last at least three years decreased 2 percent, matching the median forecast of economists surveyed by Bloomberg, after a 4.1 percent gain in September that was larger than initially reported, the Commerce Department reported today in Washington. Orders for aircraft and capital goods, such as machinery and computers slumped.

The 16-day partial federal shutdown last month combined with continuing budget cuts have prompted companies such as Lockheed Martin Corp. (LMT) to trim staff and close factories, which will weigh on growth. A lack of a rebound in bookings this month will mean businesses are unwilling to investment in expanding amid concern the economic expansion won't accelerate in 2014.

'There's not that sense of new capital spending,' John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said before the report. 'There may be a replacement of capital, but not new capital spending that needs to be stimulated because of higher output production levels.'

Excluding transportation equipment, where demand is often volatile month to month, orders declined 0.1 percent after a 0.2 percent gain in September. Bookings excluding transportation gear have been down in three of the past four months.

Jobless Claims

Another report today showed fewer Americans filed applications for unemployment benefits last week, a sign that the labor market is showing resilience.

Jobless claims in the week ended Nov. 23 unexpectedly declined 10,000 to 316,000, the fewest in two months, according to figures from the Labor Department. The median forecast of 44 economists surveyed by Bloomberg called for an increase to 330,000.

Stock-index futures were little changed after the reports, trimming earlier gains, as waning demand for manufactured goods outweighed the unexpected drop in jobless claims. The contract on the Standard & Poor's 500 Index maturing in December was up less than 0.1 percent at 1,802.7 at 8:35 a.m. in New York.

Forecasts for durable goods in the Bloomberg survey of 79 economists for total durable goods orders ranged from a drop of 9.9 percent to a 1.2 percent advance.

Aircraft Bookings

Bookings for commercial aircraft fell 15.9 percent in October after surging 59.2 percent the prior month. Chicago-based Boeing Co. (BA) said earlier this month it received orders for 79 aircraft in October, down from 127 in September. The company emerged as the winner from the Dubai Air Show this month, where it surpassed 1,000 orders for the 787 Dreamliner and made the 777X launch the most successful ever for a large aircraft.

Demand for non-defense capital goods excluding aircraft, a proxy for future business investment in computers, electronics and other equipment, declined 1.2 percent in October after falling 1.4 percent drop the prior month. It was the first back-to-back decrease in a year.

Shipments of those products, a measure used to calculate gross domestic product, fell 0.2 percent in October for a second month.

Bethesda, Maryland-based Lockheed Martin, the largest U.S. government contractor, said this month it will cut 4,000 jobs and close some operations in response to decreased federal spending, even after third-quarter profit rose 16 percent.

Defense Cutbacks

The Defense Department faces budget reductions of about $500 billion over a decade under the automatic cuts known as sequestration, including about $52 billion in the current fiscal year.

'In the face of government budget cuts and an increasingly complex global security landscape, these actions are necessary for the future of our business and will position Lockheed Martin to better serve our customers,' Chief Executive Officer Marillyn Hewson said in a Nov. 14 statement.

Not all categories retreated last month as automobiles and electrical equipment and appliances showed gains.

The housing recovery has spurred demand for big-ticket goods such as appliances and furniture, benefiting companies including Benton Harbor, Michigan-based Whirlpool Corp. (WHR)

'Every new home equates to about four new appliances and every existing-home sale equates to about two new appliances,' Larry Venturelli, chief financial officer at Whirlpool, said at a retail conference in New York on Nov. 20. 'We are really in the third inning of growth within housing and this is a big demand driver for us going forward.'

More Backlogs

Order backlogs at factories climbed 0.3 percent in October after a 0.9 percent increase the prior month, today's report showed. Unfilled orders excluding military and transportation equipment rose 0.3 percent following a 0.6 percent advance.

While a surge in inventories boosted economic growth last quarter, it also probably means companies will rein in inventories in the last three months of the year, trimming gross domestic product, according to economists such as Wells Fargo's Silvia.

Others say the gain is just keeping up with improving sales, which indicates the gains are intended and therefore may not necessarily be reversed. Total durables shipments advanced 0.2 percent in October.

'While inventories are climbing, the good news is that final sales are accelerating too,' Neil Dutta, head of U.S. economics at Renaissance Macro research LLC in New York, said in a Nov. 22 note to clients.

The economy grew at a 2.8 percent annualized pace in the third quarter, the best performance in a year, according to data from the Commerce Department. Business investment climbed at a 4.1 percent rate after jumping by 11.8 percent in the previous three months. The jump in inventories added 0.8 percentage point to growth.

To contact the reporter on this story: Michelle Jamrisko in Washington mjamrisko@bloomberg.net

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

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