Factory Orders’ 1.5% Drop Sends an Ominous Signal

Orders for goods made by the nation’s factories fell 1.5% in June, the government said Thursday in a report that analysts said confirmed that the manufacturing sector was sickly.

The Commerce Department reported that orders fell to a seasonally adjusted $237.4 billion in June, with the sharpest drop coming in defense hardware such as military aircraft.

The drop was steeper than expected by economists, who had forecast a 1% decline. Orders rose 2.2% in May, the department said, revising its previous report of a 2.1% gain.

“There is no real sign of strength anywhere,” said Norman Robertson, chief economist with Mellon Bank in Pittsburgh. “The little flurry of activity that we saw in the second quarter has evaporated.”

On Wednesday, a survey released by the private National Assn. of Purchasing Management showed a steep decline in manufacturing activity in July, after three months of growth.

“This report implies very weak economic growth during the second half this year,” Robertson said of Thursday’s data. “I don’t think we’ll have a recession, but the margin of safety is going to be uncomfortably small.”

A sharp rise in oil prices the past month, culminating in Thursday’s big jump after Iraq invaded Kuwait, worsens problems for the nation’s manufacturers and raises the risk of recession, analysts said.

“This is an economy walking on a precipice, and the last thing it needs is a stiff wind that could push it over,” said Robert Dederick, chief economist at Northern Trust Co. in Chicago. “A big jump in oil prices could be that stiff wind.”

Orders for nearly every major category of goods fell or were flat in June. But more than half the $3.7-billion drop in orders from May came from a big fall in demand for military goods, especially aircraft, the department said.

Defense orders fell 20.3% in June after rising 19.9% in May. These orders traditionally are volatile because of their large value and long production schedules. But recently the trend has been for lower defense orders.

Even excluding defense, factory orders fell 0.7% after rising 1.5% in May.

Inventories of all types of goods dropped by 0.5%, the biggest monthly drop this year, indicating producers were unwilling to chance a buildup of unsold goods until consumers show signs of buying.

A key component of factory orders--durable goods--fell 2.8% in June after rising 4.1% in May. Durable items like refrigerators and automobiles are designed to last at least three years.

Orders for transportation equipment slid 4.9% in June after increasing 10.2% in May.

Auto makers had been expected to build stocks during summer to prepare for a possible September strike by the United Auto Workers union. But orders of motor vehicles and parts rose a slim 2.2% in June after a 12.9% May increase.

FACTORY ORDERS Total new orders in billions of dollars seasonally adjusted June, ‘90: 237.4 May, ‘90: 241.0 June, ‘89: 235.2 Source: Commerce Department