By Rajashree Chakravarty
Durable goods orders for February fell unexpectedly, much to the disappointment of manufacturers and traders.
Orders for durable goods, which last more than three years, dropped 1.4 percent compared to a revised 2 percent gain in January, according to data released by the Department of Commerce on Wednesday.
The rising dollar, severe snowstorms and port disruptions on the West Coast, along with slow economic growth worldwide, signaled lackluster growth in the first quarter.
Strong employment and solid gains in consumer spending indicate the U.S. economy is recovering from the 2008 recession. But a plunge in oil prices since last fall, declines in copper and coal prices globally and less drilling by oil and gas companies led to a decrease in business equipment spending, which had climbed to 0.9 percent in the last quarter.
“The recent dramatic decline in the price of oil is the most significant reason for the year-over-year decline in our sales and revenues outlook,” said Doug Oberhelman, chairman and chief executive office, in recent a statement.
Forecasts of durable goods orders by economists in the Bloomberg survey ranged from a 2 percent drop to a 3.5 percent increase. The median consensus of around 80 economists surveyed by Bloomberg said durable goods orders might increase 0.2 percent.
Globally, American-made products are in less demand because of the strong dollar, with customers preferring to buy from elsewhere.
“Stronger dollar has reduced earnings from abroad,” said Scott J. Brown, senior vice president and chief economist of Raymond James. “We have had a number of firms either report weak earnings or cautioned earnings are slowing down because of the strong dollar.”
More imports and softer exports point to a trade deficit that would widen over a period of time. In general, the speed of exchange rate is of more concern rather than the level of it.
“We have had a very sharp rise in the dollar over the last few months and that tends to be unsettling,” said Brown.
Another major factor, capital spending comprising capital profits and cash flows, have widely contributed to slower business investments. A good example is capital goods orders non-defense excluding aircraft. This number has been negative for 6 consecutive months and for 9 of last 12 months — a sign that businesses are skeptical about investing in long-term projects at high rates.
“Businesses provide returns in the long run,” said Guy Lebas, managing director, fixed income strategy, Jannery Montgomery Scott LLC. “If businesses aren’t investing in long-term organic projects, their opportunities to generate income for months or years, perhaps for decades down the road, is going to be impaired.”
Other important factors that have led to the plunge in durable goods orders are a regulatory environment that imposes costs on some of these investments; uncertainty about the structure of corporate taxes many years hence that could change the returns to investments; and a low-interest environment that has compressed the potential returns on a lot of long-term projects.
Though big firms have been able to borrow money from the corporate bond markets or big banks at relatively low rates, demand has gone down because of soft global economy.
Economists and industry insiders anticipate things will pick up in the spring, but first-quarter forecasts have left everyone in doubt. Data for March and April are expected to reflect a rebound in gasoline prices that will boost consumer purchasing power and some strength in spending.