U.S. factory orders rebound solidly, but trend still soft

By Reuters

May 04, 2015 06:36 PM EDT

New orders for U.S. factory goods recorded their biggest increase in eight months in March, boosted by demand for transportation equipment, but the underlying trend remained weak against the backdrop of a strong dollar.

The report on Monday from the Commerce Department was the latest indication that the rebound from the first quarter's abrupt slowdown would not be as strong as experienced during the same period last year when output was chilled by cold weather.

"It was a difficult winter for manufacturers and it appears they are still hurting after the strong run in the dollar late last year," said Chris Low, chief economist at FTN Financial in New York.

New orders for manufactured goods increased 2.1 percent, the largest gain since July last year, after dipping 0.1 percent in February. It was the first rise since last August and was buoyed by a 13.5 percent jump in orders for transportation equipment.

Orders excluding transportation were flat in March. February's 0.1 percent gain in orders for manufactured goods outside transportation was the first rise since June.

The dollar rose against a basket of currencies while prices for U.S. Treasury debt fell. Stocks on Wall Street were trading higher, with healthcare shares leading the way.

Manufacturing, which accounts for about 12 percent of the U.S. economy, has been hit by the strong dollar and lower crude oil prices, which are putting a squeeze on the profits of multinational corporations and oil firms.

That together with harsh weather and a now-settled labor dispute at the West Coast ports helped to hold the economy down to a 0.2 percent annual growth pace in the first quarter.

The factory data added to reports on auto sales, housing and employment in suggesting the economy was regaining some speed, but probably not fast enough to encourage the Federal Reserve to start raising interest rates next month, as most economists had anticipated at the beginning of the year.

The dollar has appreciated 12 percent against the currencies of the United States' main trading partners since June on expectations of tighter monetary policy and economists estimate it could shave 0.6 percentage point off growth this year.

Companies like Schlumberger, the world's No.1 oil-field services provider, and Halliburton have slashed their capital expenditure for this year citing lower oil prices.

Multinational corporations, including Procter & Gamble Co, the world's largest household products maker, Colgate-Palmolive and Whirlpool Corp, the world's largest maker of home appliances, have lowered their profit forecasts for the year because of the dollar.

The Commerce Department also said orders for non-defense capital goods excluding aircraft - seen as a measure of business confidence and spending plans - edged up 0.1 percent instead of the 0.5 percent drop reported last month.

"Seldom do things look this bad for the factory sector outside of recession," said Tim Quinlan, an economist at Wells Fargo Securities in Charlotte, North Carolina.

"We still maintain that things will improve as the year progresses. The bulk of the declines in activity related to lower energy prices has run its course, baring another significant down leg for oil prices."

Supporting the cautious optimism, order books at factories rose a bit in March after three straight months of declines.

Further gains are likely after a report last week showed some stabilization in factory activity in April after slowing for five straight months, as well as a solid rise in new orders.

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