Factory orders increase more than expected

/ Source: The Associated Press

Orders to U.S. factories rose by a larger-than-expected amount in July as demand for commercial aircraft, heavy machinery and iron and steel all posted solid gains.

The Commerce Department reported Wednesday that new orders increased by 1.3 percent in July, much stronger than the 0.8 percent increase economists had been expecting. The July advance follows an even bigger 2.1 percent increase in June and represents the fifth straight rise in orders.

Manufacturers have seen a sharp slowdown in the U.S. economy offset by strong gains in foreign demand, helped by a weaker dollar which makes their products more competitive overseas.

Wall Street was generally unimpressed with the report on factory orders. Stocks declined in afternoon trading, marking the third straight session that stocks have fallen.

Private economists said the unexpectedly big increase in July factory orders came from strong demand for American exports. It was also helped by companies that increased their spending on equipment to take advantage of business tax breaks in the economic stimulus bill Congress passed last February.

Analysts said there was a danger that the economy could sag at the beginning of next year, however, as the business tax breaks come to an end and exports slow due to weaker growth in key overseas markets in Europe and Japan.

“If you start to see export shipments lag and the domestic economy remaining weak, that points to high risks for the early part of 2009,” said Brian Bethune, chief U.S. financial economist for Global Insight, a Lexington, Mass., forecasting company.

The government reported last week that the economy expanded at an annual rate of 3.3 percent in the April-June quarter, more than three times the growth rate turned in during the first three months of this year. The concern is that a slowdown in exports will dampen manufacturing activity and consumer spending will falter as the effect of $106.7 billion in economic stimulus payments to individuals begins to wear off.

The July strength in factory orders was led by a 28.1 percent jump in commercial aircraft, which rebounded from a 21.3 percent decline in this volatile category in the previous month.

Orders in all transportation categories rose by 3.2 percent in July, the best showing in five months. It was the second straight month that orders for motor vehicles rose, increasing by 0.6 percent in July following an even bigger 3.2 percent June advance. The gains were viewed as temporary, however, given that automakers are struggling with a weak economy and plunging demand for once-popular models because of high fuel prices.

Excluding transportation, factory orders would have risen by 1 percent, slightly below the 1.5 percent economists had been expecting.

Orders for durable goods, items expected to last at least three years, rose 1.3 percent in July, unchanged from the preliminary estimate the government made last week. Orders for nondurable goods, products such as fuel, food and chemicals, increased 1.2 percent in July.

A number of categories showed big gains in the month, too.

Demand for iron and steel jumped by 5 percent, orders for machinery rose 4.1 percent with demand for construction machinery soaring by 17.9 percent.