Durable Goods

Washington AP - U.S. factories saw a surprisingly hefty increase in their orders for big-ticket products in July, reflecting continued strength in export sales and a boost to business investment from the government's tax stimulus package.
Economists, however, remain worried that spreading economic weakness overseas and a rebound in the value of the dollar could spell an end to the export boom later this year.

The Commerce Department said Wednesday that orders for durable goods rose 1.3 percent last month, far above the slight 0.1 percent increase Wall Street had been expecting.

The July increase matched a 1.3 percent rise in June, which was revised up from an earlier reading of 0.8 percent. The matching gains were the strongest since orders for durable goods, items expected to last at least three years, jumped by 4.1 percent in December.

Wall Street investors were encouraged by the better-than-expected gain in durable goods orders. The Dow Jones industrial average rose 89.64 points to close at 11,502.51.

A huge rebound in orders for commercial aircraft, which had fallen sharply in June, led last month's strength. But even outside the volatile aircraft category, there was widespread growth, indicating that American companies are continuing to benefit from a boom in exports due mainly to the decline in the value of the dollar earlier this year.

"These upbeat capital goods numbers amid a downtrodden U.S. consumer sector indicates how helpful a weak dollar is in the current cycle," said Daniel J. Meckstroth, chief economist for the Manufacturers Alliance/MAPI, an industry trade group.

But some economists expressed concerns over how much longer the export boom can last, given spreading economic weakness in Europe, Japan and other major overseas markets. They noted that the dollar, which had been on a long slide, has come off its recent lows, which could translate into less of a price advantage for U.S. exporters.

"The recent downturn in growth abroad and stabilization of the dollar could put pressure on capital goods spending in the months ahead," said Zach Pandl, an economist at Lehman Brothers.

Other analysts were impressed with the staying-power demonstrated in the new orders figures for June and July, and some said it showed the boost manufacturers are getting from increased demand by businesses hiking their investment spending to take advantage of $51 billion in business tax breaks included in the $168 billion economic stimulus package passed by Congress in February.

The government will release its revised estimate for economic growth in the April-June quarter on Thursday, and economists said they were revising upward their estimates for both second quarter and third quarter gross domestic product growth based on the better-than-expected orders numbers. GDP measures the value of all goods and services produced within the U.S. and is the broadest barometer of the country's economic health.

David Wyss, chief economist at Standard & Poor's in New York, said he believed the current estimate of 1.9 percent GDP growth for the second quarter will be boosted to between 2.5 percent and 3 percent, while growth in the current quarter will be around 1.7 percent.

"Exports are holding up a lot better than we thought they would with the weakness in Europe and Japan, and we are seeing the impact of the stimulus package on business investment decisions," he said.

Demand for commercial aircraft shot up 28 percent in July. Economists cautioned against reading too much into that one-month surge since it followed a 21.3 percent decline in June in what is a very volatile category. While there is concern that airplane makers will be hurt by soaring jet fuel prices that has forced airlines to cancel or delay contracts for new planes, other analysts said such weakness could be offset by increased orders by many booming Asian countries.

Chicago-based Boeing Co. wrapped up the huge Farnborough, England, international air show last month with orders for 197 planes, including a headline grabbing deal with Air China for 45 planes. European rival Airbus did even better, signing orders for 247 planes.

Boeing is currently negotiating a new contract with the International Association of Machinists. The union is warning the company that a greatly improved offer is needed if it wants to avoid a strike when the current contract expires on Sept. 3.

Elsewhere, orders for motor vehicles also rose by 1.2 percent in July. While it was the second straight monthly increase, it mainly reflected a rebound following curtailed activity related to the strike at auto parts supplier American Axle rather than a sign of any sustained rebound in the beleaguered sector.

Detroit's automakers have watched demand slump this year because of the anemic economy and soaring gasoline prices which hurt sales of previously hot models such as light trucks and sport utility vehicles. Auto sales fell in July to the slowest pace in 16 years with General Motors Corp. reporting a drop of 26 percent compared to July 2007, while Ford Motor Co. experienced a 15 percent decline.

Overall, orders for transportation equipment were up 3.1 percent last month after a 1.9 percent drop in June. Outside of transportation, orders posted a 0.7 percent increase, far better than the 0.3 percent decline analysts had expected.

Strength outside of transportation reflected strong gains in such categories as primary metals, including steel, and machinery, both areas which have been helped by overseas demand.

Non-defense capital goods excluding aircraft, a category seen as a good proxy for business investment, jumped by 2.6 percent last month, the best showing since April. Analysts attributed part of this gain to decisions by companies to take advantage of provisions in the economic stimulus bill that rewards tax benefits to companies who purchase equipment this year.