Drop in Orders for Durable Goods Prompts Recession Fears

Fears of a U.S. recession intensified Wednesday as the government reported the biggest drop for orders of big-ticket durable goods in 3 1/2 years--a drop much worse than economists had forecast.

The economy had been expected to maintain a modest growth pace for the rest of the year following its sizzling performance in 1994. But the Commerce Department’s report, which shows a 4% plunge in durable-goods orders in April from the previous month, prompted some observers to worry that the economy might not only slow later this year, but stop growing altogether.

“We’re flirting with a recession,” said David Levy, an economics forecaster in Chappaqua, N.Y.

But the report also sent government bond prices surging and their yields tumbling to a 15-month low on expectations that the sputtering economy would preclude the Federal Reserve Board’s raising interest rates again this year--and that it might even lead to lower rates.

Prices of the Treasury’s bellwether 30-year bond soared 1 5/8 points, or $16.63 for every $1,000 in face value, and its yield dropped to 6.74% from 6.86% on Tuesday.

Stock prices, meanwhile, ended barely ahead as Wall Street tried to sort out whether the bullish outlook for lower lending costs would be offset by a drop in corporate profits caused by a severe slowdown in the economy. The Dow Jones average of 30 industrials edged up 1.72 points to a new high of 4,438.16.

Prospects for falling interest rates also pushed the dollar mostly lower, because declining rates make dollar-denominated investments less attractive.

Until now, the national economy appeared to be slowing gradually--a “soft landing” as it’s popularly called--because of the series of interest rate hikes the Fed engineered in the past 18 months.

The U.S. gross domestic product, the nation’s broad gauge of economic activity, had already slowed to a 2.8% annual rate in this year’s first quarter, down from the sizzling 5.1% pace of the fourth quarter of ’94. Economists had looked for expansion in the second half of 1995 to stay in the 2%-to-2.5% range.

But the Commerce Department report stirred concern that perhaps the central bank has slammed on the brakes too hard. At its latest meeting Tuesday, the central bank’s Federal Open Market Committee, which sets rates for the Fed, made no change in them. It will meet again July 5.

Many economists had expected the durable-goods orders to show a modest drop of 0.5% or so for April, so the report “was a real shocker,” said Gary Schlossberg, senior economist at Wells Fargo & Co. in San Francisco. But Schlossberg also said that even if the national economy should slip into recession in the coming months, California’s economy should fare better. The state, in lagging the nation’s emergence from the recession of the early 1990s, still has room to grow, he said.

“If the U.S. goes into a recession sooner rather than later, California will undoubtedly feel some of the effects,” Schlossberg said, “but I think the slowdown will be more modest in California.”

It was the third straight decline in orders for durable goods--items expected to last at least several years--and the biggest drop since they tumbled 5.4% in December, 1991.

To be sure, analysts are reluctant to exaggerate the significance of one economic statistic covering only one month, particularly because the figures are often revised later. Further, the durable-goods report also includes the volatile category of orders for airplanes and other transportation equipment.

The report also shows a sharp drop in demand for automobiles, a critically important segment of the economy.

“What happened today is the burden of proof shifted to those who think the economy is going to re-accelerate,” said John R. Williams, chief global markets economist at Bankers Trust Co.

The drop in durable-goods orders went well beyond transportation products. Business investment in factories and equipment, which until now has remained strong even as consumer demand fell, dropped 4.2% for its first decline since December. Electronic equipment and primary metals also fell.

Overall, durable-goods orders totaled a seasonally adjusted $156.5 billion, down $6.5 billion from March, the government said.

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Associated Press contributed to this report.

* ROCKY MOUNTAIN HIGH GRADES

Colorado again earned top honors in an enterprise development survey. D2

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Orders Slump

New orders for durable goods, in billions of dollars, seasonally adjusted:

April 1995: $156.5

Source: Commerce Department