Durable Goods Post Biggest Gain Since ’70 : 10.7% Rise in July Strengthens Optimism for Recovery
Factory orders for durable goods in July recorded their biggest one-month gain since 1970, the government said Friday in a report that brought new predictions of a long-awaited strengthening of the economic recovery.
Last month’s 10.7% jump was led by surging orders for aircraft and automobile parts, as well as healthy increases in many other kinds of factory goods.
Many analysts had expected durable goods orders to increase only 1% last month, and the much stronger report boosted the dollar and triggered a sharp rally in the stock market. In New York Stock Exchange trading, the Dow Jones industrial average ended up 32.87 for the day, closing at a record 3,040.25.
“From this we have to read that as of July, the recovery was alive and well,” said Robert Dederick, economist with Northern Trust Bank in Chicago, noting that earlier reports of July retail sales, housing starts and industrial production painted a similar picture.
Economists said the report eased fears of a “double-dip” recession and probably will keep the Federal Reserve Board from further easing interest rates to stimulate the economy, for the time being at least.
But, analysts said the economic picture is far from unequivocal and cautioned that upcoming reports--notably a report on unemployment claims due Sept. 6--could put a very different complexion on matters.
Dederick noted that airplane and defense orders accounted for much of the overall July increase, and both sectors are too volatile to have much meaning for the broader economy. When those elements are removed, “it takes the gain down from enormous to just large,” he said.
For the month, orders for durable goods were a seasonally adjusted $129.9 billion, somewhat below the July, 1988, record of $134.4 billion. Durable goods are defined as manufactured products that are intended to last at least three years.
The biggest slice of last month’s gain involved orders for transportation equipment, which jumped 24.5% to $37.25 billion following two months of moderate gains. More than three-quarters of the transportation goods came in aircraft orders, which tend to gyrate because of their high cost.
Defense orders rose 17.1% in July, after falling 12.7% in June. But, even excluding this notoriously volatile category, durable goods were still up a solid 10.3% for the month.
Jay Levy, chairman of the Jerome Levy Economic Institute at Bard College in Annandale, N.Y., said the July jump in durable goods orders to some extent reflects only an anticipated rebuilding of inventories by businesses.
He agreed that the report may be enough to prevent the Fed from further lowering interest rates, adding: “That should be a negative for the economy.
“We should interpret this as one report, and only one report. In the context of others indicators, the news is not so favorable.”
Levy said the trend suggested in the durable goods orders was not confirmed by recent changes in unemployment insurance claims. Initial unemployment claims were hovering over 500,000 a week in June, fell to 400,000 about the first of July, but by last week had edged up to 430,000, he said.
And, he said, there have been other signs of continued economic weakness, such as the announcement by United Technologies this week that it needed to cut expenses by $1 billion.
Dederick said long-term interest rates, such as those on home mortgages, may drift up because of the report. “But we’re not talking about anything dramatic,” he said.
And, he predicted that if the August unemployment due in two weeks is weak, the Fed may cut rates anyway.
Durable Goods
New orders
Billions of dollars, seasonally adjusted
July, ‘91: 129.9
June, ‘91: 117.3
July, ‘90: 129.4
Source: Commerce Department
