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Manufacturers lose confidence, demand tumbles

/ Source: msnbc.com staff and news service reports

New orders for durable goods such as airplanes and autos tumbled in June, raising worries that manufacturing is softening as companies' concerns about the recovery intensifies.

The Commerce Department said durable goods orders dropped 2.1 percent, reversing May's downwardly revised 1.9 percent increase. Durable goods are items ranging from toasters to aircraft that are meant to last three years or more.

Economists polled by Reuters had expected orders to rise 0.3 percent last month after May's previously reported 2.1 percent increase.

"In a word: disappointing. It should be a negative, it's kind of a slightly volatile indicator. The situation right now is that it'll have to take a backseat to the deficit and Washington. Believe it or not, markets can't believe politicians are playing this game. Most people believe they'll get it done, so they're not concerned about durable goods," said Jeffrey Friedman, senior market strategist at Lind-Waldock.

Washington is deadlocked over how to cut the nation's lont-term budget deficit and clear the road for raising Uncle Sam's $14.3 trillion borrowing authority. If lawmakers cannot settle on a deal by August 2, the U.S. may not be able to pay all its bills for long, could lose its AAA credit rating and may default on its debt.

"Surveys heading into the year suggested that businesses were ready to deploy cash to invest in labor and capital, and the year has created a lot of uncertainty that has businesses remaining cautious in doing so," said Brian Levitt, an economist at OppenheimerFunds in New York.

"We're going to need some clarity over the next week and if events turnout as the market hopes it will, there is still some impetus for growth as we head out into year-end."

Durable goods orders are a leading indicator of manufacturing. Though orders tend to be volatile, last month's unexpected decline could add to fears of a slowdown in factory activity and support views that the economy will not emerge quickly from its current soft patch.

Manufacturing has been the bright spot in the economy, whose recovery has faltered since the start of the year.

Data on Friday is expected to show the economy grow at a 1.8 percent annual rate in the second quarter, according to a Reuters survey, after expanding 1.9 percent in the January-March period.

Orders last month were pulled down by an 8.5 percent drop in orders for transportation equipment. That reflected a 28.9 percent plunge in aircraft orders. Boeing received 48 aircraft orders, up from 27 in May, according to information posted on the plane maker's website. However, the bulk of the orders were for its less expensive models.

Motor vehicle orders dropped 1.4 percent as manufacturers continue to deal with disruptions to production following the earthquake in Japan. Motor vehicle orders rose 0.3 percent in May.

Excluding transportation, durable goods orders edged up 0.1 percent after an unrevised 0.7 percent rise in May. Economists had expected this category to rise 0.5 percent.

Outside of transportation, orders for machinery fell 2.3 percent, while primary metals rose 1.0 percent. Capital goods orders fell 4.1 percent, while computers and electronic products edged up.

Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, slipped 0.4 percent last month after a revised 1.7 percent rise in May.

Economists had expected a 0.8 percent gain from a previously reported 1.6 percent increase.

Shipments of non-defense capital goods orders excluding aircraft, which go into the calculation of gross domestic product, rose 1.0 percent after increasing 1.7 percent in May.