New orders for durable goods surged 5.7 percent in February, the fifth time in the last six months that the key measure of manufacturing activity increased.
The monthly gain, which beat expectations by nearly 2 percent, was driven by a big jump in civilian aircraft orders.
Boeing recorded 179 aircraft orders last month, up from just two in January, according to data on the company’s website. Overall, demand for transportation equipment was up 21.7 percent in February, the U.S. Commerce Department said Tuesday in its monthly report on durable goods.
But the surge in airplane orders and defense spending obscured some underlying weakness in the manufacturing sector. When those volatile factors were removed, orders for so-called core capital goods, which the government uses to measure business spending, slumped 2.7 percent.
“These aerospace contracts won’t be delivered five years or more, you have to smooth it out over a long period of time,” said Daniel Meckstroth, the chief economist at the Manufacturers Alliance for Productivity and Innovation. “You get these big lumps because it’s a huge order (but) it’s not really indicative of what’s happening the next couple of months.”
Mecksforth believes the economy will grow 2 percent or less this year, with manufacturing doing slightly better. And despite the Federal Reserve’s aggressive moves to stimulate the economy by suppressing interest rates, business spending has not picked up significantly.
“The good news is it’s growing,” Mecksforth said. “The bad news is, it’s not booming.”
The situation at Boeing may be emblematic of the underlying issues in the manufacturing sector and the overall economy. Boeing is taking big orders for planes and plans to increase production rates this year, but also recently announced layoffs.
Boeing has received orders for another 191 airplanes so far this month, including 143 from American Airlines. Last month, American ordered 100 planes from Boeing.
Tim Bader, a Boeing spokesman, said American cleared a key hurdle in its bankruptcy case in January, which allowed Boeing to formally record orders for planes that the airline had previously agreed to purchase. American has announced plans to merge with U.S. Airways.
Despite the increased purchasing from Boeing the last two months, the company announced plans last week to layoff 800 machinists in the Puget Sound area by the end of the year. A company spokesman told the Seattle Times the total layoffs for the company could reach 2,300 in 2013, but said the job cuts were expected once production “stabilized” on the new 787 Dreamliner and 747-8 jumbo jet.
Boeing plans to double production rates on the 787 this year, despite its battery issues.
*U.S. Department of Commerce
*U.S. Department of Commerce
Durable goods are big-ticket items expected to last at least three years, and run the gamut from household appliances like washing machines and refrigerators to building materials like bricks and steel. New orders have been ticking upward since last August. Orders fell 3.8 percent in January, after a revision from the original 5.2 percent drop, but the decline was attributed to sharp drops in defense spending and aircraft orders.
Still, some analysts are skeptical of the so-called American “manufacturing renaissance.” While rising productivity among American manufacturers has been part of the economic recovery, a recent report from a top Goldman Sachs economist said the improvements in the sector where cyclical, rather than structural.
“Over the next few years, the manufacturing sector should continue to grow a bit faster than the overall economy, but the main reason is likely to be a broad improvement in aggregate demand, rather than a structural U.S. manufacturing renaissance,” Goldman’s Jan Hatzius wrote in a March 22 analysis.
Hatzius called the outlook for the manufacturing sector “reasonably bright,” with lower energy and labor costs boosting domestic productivity. Still, he said performance of U.S. exports remains “middling at best.”
And the United States’ trade deficit is growing, suggesting to some observers that the Federal Reserve’s “cheap money” policy is boosting foreign producers. Economic analysts said the trade deficit was a key drag on the economic recovery.
“The only way to increase growth and increase hiring without also increasing the country’s debt is to reduce the trade deficit,” said Alan Tonelson, a research fellow at the United States Business and Industry Council, which represents nearly 2,000 small and medium-sized American-owned manufacturing firms.
Tonelson said the economic recovery, driven by the Federal Reserve’s aggressive monetary policy, has focused on “boosting consumption” by putting money into the market. But some of those gains have gone to foreign companies as the trade deficit continues to climb.
“We’re buying more stuff from our U.S. companies, but we’re buying even more stuff from aboard,” Tonelson said. “The easy money hasn’t boosted production enough to close that gap, in fact it’s growing.”
There are other signs that the Fed’s so-called easy money isn’t penetrating the economy. Housing prices continued their steady climb in February, but new home sales dipped 4.6 percent. The lack of inventory on the market is driving prices higher, in part because construction firms can’t get loans to start new projects.
“We keep hearing its improving and banks are saying they’re going to make it easier, but it hasn’t really manifested itself in the market,” said Walter Molony, a spokesman for the National Association of Realtors. “They’re sitting on the money and not putting it to work in the economy.”