Durable Goods Orders Unexpectedly Decline : Economy: The 1.5% drop in October is seen as a result of the Fed’s interest rate increases.

Orders for durable goods such as cars and airplanes posted a surprise drop in October, the Commerce Department reported Wednesday, suggesting that higher interest rates may be cooling off the economy.

Analysts said the 1.5% decline in durable goods orders to a seasonally adjusted $152.8 billion--the first decline in three months--illustrates that tighter credit is having the effect policy-makers intended.

“Certainly this is what we have been expecting,” said economist Sung Won Sohn of Norwest Corp. in Minneapolis. “The effect of high interest rates is beginning to have an impact on these orders.”

The Federal Reserve Board has raised short-term interest rates six times this year, including a steep three-quarters of a percentage point rise last week, to try to slow economic growth to a non-inflationary rate of about 2.5% a year.

The central bank’s strategy may be paying off, bringing demand for goods and services down in a gradual decline likely to become more apparent in 1995, analysts said.

The Fed’s first five rate hikes, between February and September, “were already nibbling away at economic growth in October,” said economist Robert Barr of the U.S. Chamber of Commerce.

“With the economy already slowing, the Fed’s sixth increase . . . may have given interest rates the teeth to really bite into economic growth in the coming months,” Barr said.

Separately, the Labor Department said new applications for jobless benefits were stable at 326,000 for the week ended Nov. 19, the same as a week earlier.

But a University of Michigan survey said its index of consumer confidence sagged to 91.6 in November from 92.7 in October, an indication that consumers were growing worried.

Wall Street economists had forecast a 0.4% gain in October durable goods orders, rather than the 1.5% drop reported. But a steep 9.4% plunge in orders for transportation goods, mainly cars and airplanes, pulled overall orders lower.

“The capital spending boom is running its course and so is the auto boom,” said Cynthia Latta, an economist with DRI/McGraw Hill Inc. in Lexington, Mass.

Auto plants are still busy and in many cases scheduling overtime to fill existing orders for popular 1995 models. However, the orders report indicates waning activity ahead as dealers judge that consumer demand is leveling off.

“We’re running out of pent-up demand in the auto industry, and businesses are up to their ears in new computers and information-processing machinery,” Latta said.

Last month’s drop in transportation orders was the largest since July, when they fell 14.8%.

Because transportation accounts for about a fifth of durable goods made in the United States, weaker demand greatly affects manufacturing.

Excluding transportation, durable orders in October gained 1.1% after a 0.4% rise in September.

In another key category, orders for non-defense capital goods, a measure of business investment in new equipment, fell 2.9% after a 3.6% rise in September.

Shipments of finished durable goods, an indicator of current demand, fell 1.2% in October after a drop of 0.8% in September.

Analysts said a slowdown in orders for durable goods might last for some time, but they said it is not likely to be a precipitous one.

“The fourth quarter of 1994 is expected to be pretty strong because of strong holiday buying,” said economist Gordon Richards of the National Assn. of Manufacturers. “But the first quarter of 1995 is likely to be slower as higher interest rates begin to have an effect.”

Durable Goods

New Orders, in billions of dollars, seasonally adjusted

Oct., ‘94: 152.8

Source: Commerce Department