Weak Durable Goods Orders in June

Wed Jul 28, 2004
By Alister Bull

WASHINGTON (Reuters) - U.S. durable goods orders were disappointingly weak in June but hopes for America's expansion remained on track as the Federal Reserve said the economy advanced in June.

The Commerce Department said on Wednesday orders for big-ticket items meant to last at least three years rose 0.7 percent after shrinking 0.9 percent in May. However, May's drop was revised from a 1.8 percent decline.

Wall Street expected a much stronger rebound after two months of losses. A Reuters poll of analysts had forecast a 1.9 percent rise, which would have given much fuller support to Fed Chairman Alan Greenspan's recent assurance the economy would pick up after hitting a temporary soft spot.

His outlook underpins expectations the Fed will raise interest rates again at its next meeting on Aug. 10 after it made its first move up in 4 years in June, lifting the Fed funds rate a quarter percentage point to 1.25 percent.

The Fed's "beige book" anecdotal economic report, which was released on Wednesday, did not appear to challenge this view. It found the American economy moved ahead in June, but the pace of growth varied around the country from "modest" to "solid."

EXPANSION ON TRACK

Overall, the often volatile durables report fit with earlier signs that domestic demand fell between April and June, with declines in orders for consumer-orientated goods like computers chiming with softer spending over the quarter.

But analysts said the upward revisions to the May numbers meant the outlook for better growth was largely undamaged.

"The capital equipment recovery remains on track," said Daniel Meckstroth, chief economist of Manufacturers Alliance/MAPI.

Financial markets took the data in their stride. The dollar initially gained slightly against the euro but was later deflated by the tepid tone of the beige book and ended in New York down a bit at $1.2080 (EUR=: Quote, Profile, Research) .

U.S. government bonds didn't show any more direction, hovering during the session with prices on the 10-year Treasury note modestly higher at 101-8/32 for a 4.59 percent yield (US10YT=RR: Quote, Profile, Research) in late trade.

"It is a rebound from the last couple of months. The trouble is, it's a volatile number and it can be whipped around by a couple of big orders. Looking at the ... (year to date) -- up 12.2 percent -- it shows we are doing much better," said Bob Macintosh, chief economist at Eaton Vance Management Inc.
Analysts noted a 0.7 percent rise in June shipments suggests solid second-quarter capital spending that will make a positive contribution to gross domestic product.

The initial reading of second-quarter GDP comes out on Friday and is forecast to show growth slowed to an annualized 3.6 percent pace from 3.9 percent in the first quarter.

A General Motors Corp. (GM.N: Quote, Profile, Research) official said he expects U.S. vehicle sales for the industry to strengthen in July from June's exceptionally weak levels and to hit an annual rate in the mid-17 million range.

BOUNCE BACK

Transportation equipment orders advanced 4.2 percent and capital goods gained 4.1 percent in June. But many other categories were subdued, with computers and electronic products retreating by 1.0 percent.

Analysts said this showed healthy caution by companies that are monitoring the impact of soaring energy prices on household spending and took heart from higher capital goods spending.

Energy costs have been at high levels for much of the year. Oil hit the highest point in at least 21 years on Wednesday after bailiffs ordered Russian oil giant YUKOS to stop sales, which threatened to further strain tight global supply.

"Businesses want to spend on equipment and are just a bit cautious about demand," said Peter Kretzmer, senior economist at the Bank of America.

"We expect orders and shipments of capital goods to expand in the months ahead, as consumer spending gradually picks up in the second half of the year and business equipment spending advances with tax incentives drawing to a close," he said.

Nondefense capital goods excluding aircraft -- a measure of private-sector spending -- rose 1.2 percent and in the first half the year was up 12.8 percent from a year ago.

Some tax breaks introduced by the Bush administration to encourage business investment expire at the end of this year.

In other data out on Wednesday, new applications for U.S. mortgages climbed last week for the first time in three weeks.
The Mortgage Bankers Association said its seasonally adjusted market index, a measure of mortgage activity, last week rose 0.6 percent to 621.4 from the previous week's 617.9.

Strong loan demand for home purchases reflects the persistent strength of the U.S. housing market, the Washington trade group said.

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