Transportation, Military Sectors Fuel 8.8% Rise in Factory Orders

Orders to U.S. factories for “big ticket” durable goods advanced in June at their fastest pace in 2 1/2 years, an 8.8% increase that was propelled by soaring transportation and military purchases, the Commerce Department said Tuesday.

The surprising increase in durable goods orders followed a 1.9% decline in May and confirmed that industrial production was boosting growth, analysts said.

The $10.14-billion increase over the May total lifted orders to a seasonally adjusted $125.23 billion for the biggest increase since an 8.9% gain in December, 1985.

Analysts said the June increase provided further evidence of the strength in U.S. manufacturing.

“Stripping the fluff away, we are still left with a strong pace of activity in the durable goods sector,” said Allen Sinai, chief economist of the Boston Co.

U.S. manufacturing was in a virtual recession for two years beginning in mid-1984 as the soaring value of the dollar attracted a flood of imports into the country and made American goods non-competitive on overseas markets.

Beginning in 1985, the Administration embarked on a strategy of driving the dollar lower to boost export sales. That approach began to pay off last year, and now many industries are operating at or near capacity.

“Looking at the longer term, there is continuing strength in the manufacturing sector,” said John Hagens, vice president of the WEFA Group, a forecasting firm in Bala-Cynwyd, Pa. That strength is putting upward pressure on prices but not enough to raise the specter of runaway inflation, he said.

He said the 8.8% rise in orders in June would be worrisome if it had not been concentrated solely in one industry, transportation.

Hagens added that he saw no reason to become concerned about accelerating wage pressures from the new report.

Some analysts say that inflation fears, fed by the rapid growth, will lead the Federal Reserve Board to tighten credit more and boost interest rates.

“The inflation story has been overblown,” said Hagens, adding that the drop in oil prices has helped to offset some of the inflation effects of the drought.

Gordon Richards, an economist for the National Assn. of Manufacturers, also said the manufacturing sector was strong. While the report may have exaggerated the gains in the aircraft industry, the outlook for manufacturing overall was reasonably good, he said.

The 8.8% rise in durable goods orders reflected a 35.5% jump in orders for transportation equipment, which increased $10.03 billion to $38.24 billion in June.

The bulk of this increase came in a jump in orders for both civilian and military aircraft. Analysts had expected the rise because of announcements from Seattle-based Boeing Co. of $8 billion in new orders.

Analysts said that only about $3 billion of the $8 billion in Boeing orders showed up in the June report, meaning that the transportation sector should show further strength in coming months as the other orders surface in government statistics.

In addition to strength in aircraft, the government reported that demand for ships and military tanks also increased during the month. Without the 35.5% jump in transportation orders, overall orders would have risen 0.1%.

Demand for defense equipment was up 88.6% in June to $15.28 billion, the biggest one-month increase since a 123.2% jump in December, 1982, as the Reagan Administration’s defense buildup was beginning.

The category of non-defense capital goods posted a 9.8% increase to $34.57 billion.

Orders for electrical machinery rose 0.6% to $20.3 billion, the third consecutive monthly gain, while orders for non-electrical machinery rose an even stronger 1.3% to $20.8 billion.

Orders for primary metals fell 3.5% to $11.47 billion, the first decline since January.