Orders for Durable Goods Tumble as Businesses Show Caution

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The nation's industrial expansion sustained a setback in October as durable goods orders unexpectedly plunged 3.3%, and the more-telling ex-transportation component also sank 2.7%, the U.S. Commerce Department announced Wednesday.

It was the largest decline in orders for durable goods -- long-lasting products manufactured in the U.S. -- since January 2009, and the biggest decline in the ex-transportation component since March 2009.

A Bloomberg survey had expected October durable goods orders to dip 0.1%, after a revised 5.0% increase in September, and an 0.8% decline in August.

Economists emphasize the more-telling ex-transportation durable goods orders component as it provides an accurate read on the nation's industrial core. The ex-transportation component rose 1.3% in September, and 2.1% in August.

An Across-the-Board Poor Industrial Report

Further, October's industrial report was an equal-opportunity disappointment, as nearly every segment posted a decline.

In October, computers/electronic goods orders plunged 7.7%, capital goods orders sank 6.6%, transportation orders declined 5.2%, manufacturing plunged 4.4%, machinery declined 3.9%, appliances declined 3.4%, electrical equipment fell 3.4%, fabricated metals decreased 0.9%, and primary metals declined 0.8%. The report's lone bright spot? All other/unspecified durable goods orders rose 0.5%.

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Durable goods orders are new orders by stores and businesses for immediate and future delivery of factory hard goods. These orders measure how busy factories are likely to be in the immediate months ahead for such items as refrigerators, washers and dryers, cars, computers, and industrial machinery.

Economists follow the statistic because rising durable goods orders usually indicate that businesses are experiencing sustainable growth -- demand -- which usually translates into higher revenue and increased production by the manufacturing sector -- two bullish signs for the U.S. economy.

Also in October, shipments fell 0.9%, after increasing 0.1% in September and falling 1.3% in August.

An Anomaly, or Something Else?

The October report was a universal eye-sore and it's one that raises the question whether corporations will maintain current levels of investment in 2011. Still, investors should keep in mind that it's only one month's data -- not nearly enough to assert that the manufacturing sector expansion is ending.

That said, the capital goods component -- a proxy for business investment -- declined by a large amount: 6.6%, after spiking 11.7% in September and rising 0.9% in August. The capital goods component will have to resume its uptrend to give economists and investors confidence that business investment and the manufacturing sector will continue to add to U.S. GDP growth -- a sector of the economy that's doubly important, given the modest increases in another key commerce segment, U.S. consumer spending.
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