Are Falling Factory Orders a Bad Economic Omen?

Economic indicators gave a mixed view on the health of the United States economy on Friday. The Labor Department’s Bureau of Labor Statistics released its monthly Employment Situation report showing that the economy had created 165,000 jobs in April, slightly lowering the unemployment rate from 7.6 percent to 7.5 percent. But orders placed with U.S. factories fell more than forecast in March as the slumping economy weakened demand for metals, mining equipment, and military goods.

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March’s 4 percent drop in bookings was the largest decrease since August, according to the Commerce Department. Following the previous month’s downwardly revised 1.9 percent gain, the data indicated that companies are beginning to feel the effects of slowing growth in Europe, Asia, and the United States. As economists forewarned earlier in the year, the biggest restraint on growth has been the massive, across-the-board government spending cuts implemented in March after Congress failed to reach a fiscal deal and January’s hike in payroll taxes. While the housing market and consumer spending have acted as the twin-engines of economic growth so far this year, the spending cuts and tax increases have started to stymie consumer spending.

Economists polled by Bloomberg had expected a smaller decline in new orders, with the median forecast calling for a 2.9 percent drop.

Breaking down the new factory orders report showed that bookings for durable goods — a component that makes up slightly more than half of total factory demand — dropped 5.8 percent in March. That drop was the largest in seven months, and resulted from slumping demand for commercial aircraft. Orders for non-durable goods, including petroleum and food, decreased 2.4 percent.

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Friday’s report from the Commerce Department came on the heels of the Institute for Supply Management’s April reading of the condition of U.S manufacturing. Last month, ISM’s Manufacturing Index fell to 50.7 from 51.3, where a reading of 50 represents the dividing line between growth and contraction. The Institute’s data showed that manufacturing slowed as the need to rebuild inventories decreased and the effect of government budget cuts began to be felt.

But if employment continues to strengthen — as it did in April — new orders could improve as manufacturers prepare for increased demand. “We do expect manufacturing to bounce back in the second half as the fiscal headwinds fade and global demand starts to regain its footing,” BNP Paribas economist Bricklin Dwyer told Bloomberg. “It’s a soft patch reflecting the impact of fiscal tightening and weak overseas markets.”

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