Manufacturing Shows Surprising Strength on Jump in Factory Orders

By Annys Shin and Ylan Q. Mui
Washington Post Staff Writers
Friday, April 3, 2009

The manufacturing sector showed surprising signs of strength yesterday, with a new report indicating that factory orders rose in February for the first time in seven months. But the labor market remained weak, as the number of people filing for unemployment benefits for the first time increased unexpectedly.

The 1.8 percent increase in new orders was a rare bit of good news about the manufacturing sector, which has taken a beating as consumer spending has slowed and demand for exports has evaporated. The new data follow the release Wednesday of better-than-expected figures that showed manufacturing activity contracting at a slower pace in March and the decline in construction spending moderating in February.

These glimmers of hope are sure to bolster a view gaining currency on Wall Street and among some analysts that the free fall that began at the end of last year is ending.

"There is some sign the pace of decline is slowing a bit," Wachovia economist Tim Quinlan said. "For several months businesses were just slamming on the brakes, and it appears at this point they've eased their foot off a little bit."

Underlying the increase in new orders for manufactured goods were sizable jumps in orders for construction and industrial machinery, computers, and defense aircraft and parts. Orders for non-defense capital goods excluding aircraft, which serve as a barometer for business investment, rose 7.1 percent.

Enthusiasm over the bump in new orders was tempered by the fact that January was worse for manufacturers than previously thought. New orders fell 3.5 percent from December, compared with an earlier estimate of 1.9 percent. The steeper-than-expected drop in January orders means that despite the increase in February, manufacturers made up less ground. "It's better than a stick in the eye, but the bounce in February still leaves us very far below the recent peaks," said T. Rowe Price chief economist Alan Levenson, adding that new orders for durable goods are down more than 20 percent over the past six months.

The Federal Reserve has taken a host of steps to boost demand and jump-start the U.S. economy, including slashing the interest rates it controls effectively to zero. But the Fed's counterparts have moved more cautiously. Yesterday, the European Central Bank cut its key interest rate a quarter of a percentage point to a record low of 1.25 percent.

In the United States, many consumers are strapped for cash because of debt. Loan delinquency rates rose by a record amount during the fourth quarter of last year, with high rates among home equity loans and lines of credit, according to data released yesterday by the American Bankers Association.

The rise in delinquencies -- payments that are more than 30 days late -- was largely driven by job losses, said James Chessen, the trade group's chief economist. He said he expects that delinquency levels will remain elevated for the foreseeable future. The federal government is scheduled to release a report today that is expected to show that job losses topped 600,000 in March. Labor Department data released yesterday showed claims rose last week by 12,000 to 669,000.

"This is more like a sharp stick in the eye," Levenson said.

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