U.S. factory orders drop 0.7 per cent in January

Orders to U.S. factories fell in January for a second straight month, but a key category that signals business investment plans rebounded – a possible indication that businesses are becoming more confident.

Factory orders dipped 0.7 per cent in January, the Commerce Department reported Thursday. That followed an even bigger two per cent decline in December, which was a larger decrease than first reported and the biggest decline since July. The weakness in both months was led by large declines in demand for commercial aircraft.

Orders for core capital goods, a proxy for business investment, rose 1.5 per cent in January, recovering after a 1.6 per cent drop in December.

Demand for durable goods, items expected to last at least three years, was down one per cent in January, while non-durable goods orders slipped 0.4 per cent.

The estimate for durable goods was unchanged from a preliminary report. The weakness reflected a 20.2 per cent plunge in orders for commercial aircraft, a drop that followed an even bigger 22.3 per cent fall in December. Orders for motor vehicles and parts fell 0.9 per cent, the second straight decline. Analysts say weakness in this area will be reversed given expectations for continued gains in new car sales.

Orders for primary metals such as iron, steel and aluminum, dropped 1.2 per cent, while demand for machinery was down 0.7 per cent and computer orders fell 46 per cent.

Many economists say that manufacturing has gone through a soft patch but will be emerging to stronger growth in coming months.

That expectation is based on the view that the overall economy, after slowing in the final three months of last year and the first quarter this year, will rebound to stronger growth. Many economists are forecasting that the economy, as measured by the gross domestic product, could expand at an annual rate of around three per cent in 2014, up significantly from last year’s 1.9 per cent gain.

Last year, growth was held back by higher taxes, which dampened consumer demand and across-the-board spending cuts by the federal government. It is estimated those two factors cut growth by about 1.5 percentage points. However, those adverse impacts are now waning. With the labour market expected to keep expanding, the hope is that growth will reach the fastest pace since before the 2007-2009 recession.

The Institute for Supply Management, a group of purchasing managers, reported that its closely watched manufacturing gauge rose to 53.2 in February, up from 51.3 in January.

The increase only partly reversed a five-point drop in January, but economists were encouraged that the direction was positive. Any reading above 50 indicates manufacturing is expanding.

For February, the index rose in part because of an increase in both new and backlogged orders. There was strength in other areas as well. Four of the 18 industries that are tracked by the survey reported growth.