by Yuxin Gao
New orders for long-lasting goods—the power engine of U.S. manufacturing—reported a modest drop in February due to the drags from strong dollar and softer global growth.
New orders of durable goods, products designed to last more than three years, were down a seasonally adjusted 2.8% in February, a sharp reversal from January’s revised 4.2% growth. Non-defense capital goods excluding aircraft, which economists consider an indicator of future business expansion, dropped 1.8%.
The drop hit the optimism based on recent data that had suggested the downward trend in manufacturing was close to an end. January’s increase in new orders ended a two-month period of downturn since last November.
Economists don’t necessarily think this one bad report indicates economy is in any sort of difficulty right now.
“There is drag from strong dollar. There is drag from downturn in investment in energy infrastructure,” said Augustine Faucher, deputy chief economist at PNC financial service group, “But I don’t think it indicates there is a broad base problems in the U.S. economy.”
The overall report was weighed down by the 27.1% plunge in commercial aircraft orders. Boeing, which had reported 68 aircraft orders placed in January, had only two orders last month. This volatile change happens quite often in aircraft and defense orders, so economists tend to ignore them when looking at durable goods numbers.
Drilling activity is down because of the steep drop of oil prices since mid-2014. It continues to hurt drilling equipments orders for oil exploration.
Other trends that have been hurting U.S. manufacturers are ongoing. Exports were curbed by the stronger dollar. It aggravated the weak global demands for machinery equipments, especially for countries that labor cost is relatively low.
Lilian Moura, a Brazilian children accessories manufacturer, is delaying buying new machines from the U.S. for her factory in Rio de Janeiro.
“It became unrealistic to replace our old acrylic molding machines right now,” said Moura. She has considered to buy machines from U.S. because inflation continuously boosted labor costs in Brazil. The double-folded U.S. dollar to Brazilian Real exchange rate made Moura reply on the “handmade” clips and headbands.
On the other side, economists are worrying that the continuous downturn of global economy will eventually drag U.S. economy into deep hole.
“In February, most of the major categories were down, so it’s a bit of concern,” said Scott Brown, chief economist at Raymond James financial services company.
Orders for primary metals, fabricated metal products, machinery, computers and electronic products as well as electrical equipment, appliances and components also fell, although orders for motor vehicles and parts rose 1.2%.
Data source: U.S. Department of Commerce; Chart: Yuxin Gao
What worries economists are steeper decline of “core capital goods”— the non-defense capital goods excluding aircraft orders that economists believe reflect businesses’ investment plans. It has been down for three successive months since last December.
“It looks like business and investment is very likely to make a negative contribution to first quarter GDP,” said Brown, “I think we really going to be watching the numbers for the spring month– the March, April, May. I think that’s gonna be a lot more important to the overall outlook.”