Drop in factory orders no great cause for worry

The Outlook

And, of course, it just might deter Fed from raising interest rates

April 04, 1999|By Ted Shelsby

U.S. FACTORY orders dropped 2.5 percent in February. It was the sharpest decline in nearly four years and the latest sign that recovery in the manufacturing sector continues to be sluggish.

What is the outlook for U.S. factory orders? Will the decline hurt the U.S. economy in the future?

Anirban Basu

Senior economist, Regional Economic Studies Institute, Towson University

There are two interesting aspects of this fairly steep decline in factory orders.

One, the decline was not as steep as anticipated by most Wall Street analysts who had predicted a 2.7 percent drop.

Secondly, the decline in factory orders may bode well for the economy. It gives the Federal Reserve board another reason not to increase short-term interest rates at its May meeting.

While there is continued concern about the lagging currencies in Latin America and Asia, and the lagging demand for manufactured products abroad, the typical U.S. consumer will likely judge this as good news. It suggests a continuation of the favorable interest rate environment.

It is a sign that the economy has suffered somewhat, but it gives the Federal Reserve one more reason not to limit economic growth and allow the economy to grow at a good pace.

Oscar Gonzalez

Economist, John Hancock Financial Services

One month's figures do not make a trend.

The decline shows that the manufacturing sector of our economy is still delicate, but there is some good news and bad news in the report on factory orders.

It shows that the recessions abroad and more recently in Latin America continue to have an impact on business here.

This sector has been relatively weak for a number of months due mostly to the foreign situation.

The good news has to do with the domestic situation. Consumer demand continues to be very strong. Consumers are spending on everything from cars to clothing.

February was a fairly bad month for factory orders, but there is no reason to be overly alarmed. If you dig deeper, you will see that the decline can be traced to a decline in aircraft orders. This can come back pretty fast.

I think there is reason to be optimistic.

The factory-order numbers were better than analysts expected. While it's very clear that this sector of our economy is still weak, it is not in dismal shape.

David Huether

Director of economic analysis, National Association of Manufacturers

I would say the decline in manufacturing orders in February is indicative of manufacturing being hit by a wave rather than sailing into a stormy sea.

It would be a mistake to look at factory orders in February and conclude that it is a sign that the economy is beginning to weaken.

The reason I say this is because orders for durable goods are very irregular.

They increase and decrease every month. It is subject to orders for items like aircraft that are not ordered every month.

Durable-goods orders fell 4.9 percent in February after a 3.1 percent gain in January. That's the sector that drove factory orders down.

The biggest decline was in aircraft. They fell 14.5 percent in February after posting a 13.5 percent gain in January.

To get an idea on what is going to happen to the economy in the next few months, you should look at unfilled factory orders. These are orders that have come in, but have not been filled. It's an indication of factory production in the future.

In February, unfilled orders fell 0.4 percent, that's a lot lower than overall factory orders. If you take out such things as aircraft and tanks for the military, the decline was only 0.1 percent.

On the other hand, unfilled orders for nondurable goods -- things like household appliances -- increased 0.3 percent in February.

Factory orders can be an indication of what will happen in the economy this year, but it would be a mistake to look at figures for only one month. Three months of downward trend, however, could signal a problem.

George Mickalonis

Managing director, World Trade Center Institute of Maryland

I'm not a trained economist, but I would have to believe that the depressed markets in Asia, Russia and Latin America had a lot to do with the drop in factory orders here.

We work with about 200 Maryland companies, and 60 of them are manufacturers. Those that export are feeling the impact of recessions in other parts of the world.

There are some signs of economic recovery in parts of Asia, particularly in South Korea and Thailand. This would benefit manufacturers in our area.

Russia is still a difficult place to do business, and there is continued concern about the economies of some Central American counties.

Factory orders can be an indication of how the economy is doing, but it is important to look at more data before drawing any conclusions.

I don't see any trouble areas expect those in the export market.

Pub Date: 4/04/99

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