02/05/2008

News / U.S. Economy: Factory Orders Gain, Companies Cut Jobs

Feb. 4 (Bloomberg) -- Orders to U.S. factories rose in December by the most in five months, indicating business spending on new equipment is growing even as hiring falters.

The 2.3 percent increase follows a revised 1.7 percent advance the prior month, the Commerce Department said today in Washington. The median forecast in a Bloomberg News survey projected a gain of 2.5 percent. Excluding orders for transportation equipment, demand climbed 0.7 percent.

Exports and gains in investment may help prevent a collapse in manufacturing as the housing slump and a slowdown in consumer spending push the economy to the brink of a recession. Job cuts jumped 19 percent in January from a year earlier, Chicago-based Challenger, Gray & Christmas Inc. said in a separate report today, led by banks and construction companies.

Businesses ``are responding to uncertainty and softer demand by delaying some hiring,'' Mickey Levy, chief economist at Bank of America Corp. in New York, said in a Bloomberg Radio interview. ``You see employment is falling slightly, and I expect further modest inventory liquidation.''

The forecast was based on the median of 61 estimates in a Bloomberg News survey. Projections ranged from gains of 0.3 percent to 4.6 percent.

Treasury notes, which fell earlier today, stayed lower after the report. Ten-year yields were at 3.65 percent at 4:28 p.m. in New York, from 3.59 percent late on Feb. 1.

Durable Goods

The increase in factory orders was led by a 5 percent gain in demand for durable goods, such as airplanes and computers, that are meant to least several years.

The rise was less than the government estimated last week. Bookings for non-durable goods dropped 0.4 percent, led by declines in petroleum and beverage products.

The economy lost 17,000 jobs in January, the first decline in payrolls since August 2003, while the government reported that growth in the fourth quarter of 2007 slowed to a 0.6 percent pace, compared with an average 4.4 percent rate in the prior six months.

The Federal Reserve will probably respond by reducing its benchmark interest rate by another half a percentage point when policy makers meet in March, according to futures traded on the Chicago Board of Trade. The central bank cut the rate by a half point last week to 3 percent.

Factories entered 2008 on the verge of contracting. The Institute for Supply Management's index of manufacturing activity rose to 50.7 in January from 47.7 the prior month, which was the lowest since April 2003, the Tempe, Arizona-based group said Feb. 1. A reading above 50 indicates growth.

International Sales

The group's export index rebounded after falling in December.

Faster growth outside the U.S. has lifted demand from overseas and helped companies offset some of the slowdown in domestic purchases, economists said. Shipments to overseas buyers in November set a ninth consecutive monthly record, the Commerce Department said last month.

Bookings for transportation equipment rose 12 percent. Aircraft orders also increased 12 percent. Boeing, the world's second-biggest airplane maker, received 287 orders in December, most of those from overseas, up from the 177 the prior month.

Automobile and parts orders declined 2.8 percent, following a 0.2 percent decrease in November.

Effect on Growth

Orders for non-defense capital goods excluding aircraft, a proxy for future business spending, rose 4.5 percent, after falling 0.1 percent a month earlier. Shipments of those goods, which are used in calculating gross domestic product, increased 1.9 percent after rising 0.1 percent in November.

Orders excluding defense equipment increased 1.2 percent. Orders for defense equipment surged 82 percent.

Computer orders increased 4.6 percent in December and machinery demand jumped 7.3 percent, the most since December 2006.

Equipment makers, especially those that export, are profiting. Timken Co., the supplier of bearings to the world's top five automakers, said Jan. 31 that fourth-quarter profit rose 37 percent as it benefited from orders from the aerospace industry and China.

``Global mining and energy markets are booming as prices for many commodities are near record highs, and backlogs for bearings and bars extend well into the second half of 2008,'' Chief Executive Officer James W. Griffith said on a conference call with analysts.

Rising Inventories

Factory inventories increased 0.8 percent. Manufacturers had enough goods on hand to last 1.24 months, compared with 1.22 months in November.

Companies last quarter reduced stockpiles at a $3.4 billion annual pace, led by a drop in automobiles, a report from the Commerce Department last week showed. A 27 percent drop in production by carmakers subtracted 1 percentage point from growth.

A slump in January purchases holds out little hope for a quick turnaround. Cars and light trucks sold at a 15.2 million annual pace in January, the worst showing since October 2005, industry reports last week showed.

``Automakers and homebuilders are working off inventories, and that has got to cause further reductions up the pipeline,'' said Mark Vitner, a senior economist at Wachovia Corp. in Charlotte, North Carolina, who forecasts inventory reductions will hurt the economy through most of the year.

-With reporting from Kathleen Hays in New York, Thomas Black in Monterrey, Mexico, and Rob Delaney in Toronto. Editor: Carlos Torres, Daniel Moss

Source: http://www.bloomberg.com/apps/news?pid=20601087&sid=asSSpyQpEuuI&refer=home

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