While orders for durable goods unexpectedly dropped in July — and by the most in almost a year — a look at recent history suggests the worst is over for the third quarter.
Bookings for goods meant to last at least three years fell 7.3 percent last month, the first decrease in four months and the biggest since August 2012, the Commerce Department said today in Washington. The retreat was broad-based, with demand excluding the volatile transportation category also unexpectedly falling.
Companies tend to loosen their purse strings throughout a quarter, keeping a tight rein on spending early on and then becoming more willing to buy that extra computer or backhoe in subsequent months, said Michael Gapen, a senior U.S. economist at Barclays Plc in New York.
“The first month of the quarter is often a month of weakness and the trend has been for the durable goods orders and shipments to get stronger as the quarter goes on,” Gapen said.
That would also help explain why manufacturing surveys, such as the Institute for Supply Management’s monthly poll of purchasers, were so upbeat during a month when orders slumped.
Nothing, of course, is a sure thing. This quarter, uncertainty over fiscal policy, including the lingering effects of sequestration and the looming debate among lawmakers and the White House over the debt ceiling and the federal budget, threatens to derail the pattern and prolong the softness.
Amid the weakness in today’s report: Bookings for military equipment decreased 21.7 percent last month after a 28.7 percent jump in June, a reminder that federal budget cuts may still influence the data.
On the upside: Gapen, who characterized his firm’s forecasts for economic growth as weaker than consensus because they believe fiscal drag from sequestration will last longer than most others project, said consumer purchases — which make up about 70 percent of the economy — have the potential to outweigh negative sequestration effects.