Orders to Factories Plunge 4% : Tax Law Change Blamed in Biggest Drop in 7 Years

Orders to U.S. factories plunged 4% in January, the biggest decline in almost seven years, the government reported today.

The Commerce Department said orders for both durable and non-durable goods totaled $194.46 billion in January, $8.16 billion less than the December total, when orders rose 1.6%.

The 4% decline was the largest one-month drop since a 4.5% fall in May, 1980.

Orders for civilian goods, excluding a big rise in demand for military equipment, fell 5.2% in January, the biggest drop in the civilian category since record-keeping started in 1968.

Tax Change Blamed

Analysts placed blame for much of the weakness on the change in the tax law, which spurred heavy purchasing by consumers and businesses at the end of last year to qualify for expiring tax breaks.

With the loss of various investment incentives, business capital investment plummeted in January.

Orders for business capital goods plunged 17% in January after rising 5.7% in both November and December.

Some economists have expressed fears that the heavy advance buying that occurred last year to beat the tax changes will severely depress economic activity in the current January-March quarter, making it harder to realize the Administration’s goal of overall economic growth of 3.2% this year.

Durable Goods Plunge

The decline in orders in January was concentrated in durable goods, items expected to last three or more years. These orders totaled $103 billion in January, 6.7% below the December total. An advance report last week had put the drop in durable goods at an even larger 7.5%.

Orders for non-durable goods edged down 0.8% in January after rising 1.7% the month before.

Orders for military equipment shot up 49.7% in January, erasing much of a 57.7% decline the month before. Analysts said it is not unusual for this category to exhibit wide swings from month to month, depending on when government contracts are signed.

Within the major categories, declines were widespread. Orders for electrical machinery fell 19.8% to $14.7 billion while orders for primary metals such as steel dropped 17.7% to $8.7 billion. Orders in the transportation category were down 4.5% to $28.7 billion with the weakness coming in the auto category.

Shipments of factory goods fell 3.8% to $196.7 billion, the largest one-month decline since a 5.1% drop in December, 1974.