Durable Orders Nose-Dive 7.5%; Tax Law Blamed : Home Sales Also Plunge; Reports Dampen Hopes That Rebound Has Begun

Orders to U.S. factories for “big ticket” durable goods plunged 7.5% in January for the biggest drop in almost seven years, despite a huge gain in demand for military equipment, the Commerce Department reported Thursday.

While the weakness was attributed in large part to changes in the tax law, analysts said it showed that the long-awaited rebound in economic activity has yet to begin.

Commerce said orders for durable goods, items expected to last three or more years, totaled $102.11 billion in January, $8.3 billion below the December level, when orders had posted a 1.5% increase.

Orders for durable goods are considered a good barometer of whether industries will be stepping up production and hiring in the months ahead.

The January decline, the largest drop since a 8.2% fall in May, 1980, would have been even worse had it not been for a 51% increase in the volatile defense category.

Excluding defense orders, demand for durable goods fell 9.9% in January, the biggest decline on record. This weakness included a huge 19.7% drop in the key category of business capital spending, which provides clues to industry plans to expand and modernize production facilities.

‘Catastrophic’ Decline

Commerce Secretary Malcolm Baldrige called the January figures disappointing but said “orders should expand moderately in coming months.”

But Jerry Jasinowski, chief economist for the National Assn. of Manufacturers, said the big decline, particularly in capital goods orders, was “catastrophic.”

He blamed it on the new tax law, which took effect Jan. 1. By eliminating various business tax credits, he said, it had raised business investment costs by 20%.

Jasinowski predicted that capital spending, a key component of overall economic growth, would fall by 10% in the first three months of this year, adding further to the economy’s sluggish growth rate.

The record 9.9% drop in civilian demand followed a near-record 7.7% rise in non-defense orders in December. The big December increase and other economic barometers had led some analysts to contend that the economy was finally showing signs of renewed vigor following more than two years of lackluster growth.

Michael Evans, head of a Washington forecasting firm, said the new orders report would force downward revisions by many forecasters.

“When the orders numbers are down that much, we’ve got a lot of things going wrong with the economy,” he said. “It is weak business investment, cutbacks in consumer spending and only moderate growth in exports.”

Some analysts, however, cautioned against overreacting to such a large decline. They noted that the December figure had been inflated by a rush by both businesses and consumers to make purchases before the end of the tax year to qualify for expiring tax breaks such as sales tax deductions and more lucrative depreciation allowances for business investments.

David Wyss, an economist with Data Resources Inc., said it would take several more months to establish a trend for manufacturing demand this year. He added, however, that “it is certainly a discouraging sign, especially since it is the first one we have had under the new tax regime.”

In another report Thursday, the National Assn. of Realtors said sales of existing homes plunged a record 14.5% in January to a seasonally adjusted annual rate of 3.47 million units.

Effect of Tax Law

Analysts attributed the big January drop to tax law changes as well. They said a rush by home sellers to close deals in December when their profits would be subject to lower tax rates had inflated the sales figures for that month.

The 51% jump in orders for military equipment, to $6.61 billion, last month followed a 57.7% plunge the month before. Analysts said such big swings in this category are not unusual.

The 19.7% fall in non-defense capital goods followed 5.7% increases in both November and December. That strength had come as businesses put in rush orders for computers and other types of capital investments to qualify for faster depreciation allowances under the old tax law.