Factory orders for durable goods, a major barometer of future economic activity, dropped 2.1 percent in October, largely because of a steep fall in defense orders, the Commerce Department said yesterday.
The decline in orders for big-ticket factory items was the sharpest since a 2.3 percent drop in July, Commerce said. Defense orders fell 26.6 percent after falling 21.1 percent in September.
Excluding defense, new orders were virtually unchanged, the department reported.
The weakness in new orders indicated that capital spending next year may be low, economists said.
Commerce Secretary Malcolm Baldrige said in a statement that capital spending incentives are needed to help U.S. industry compete with their foreign counterparts. Baldrige's comments followed the House Ways and Means Committee's completion of a tax-reform package that reduces many incentives put in place at the beginning of the Reagan administration.
"Intense competition from abroad makes it imperative that we preserve incentives for capital investment," Baldrige said. New orders for nondefense capital goods "have grown very little this year."
The main reasons for the slowdown in orders were the overall slow pace of the economy in the first half, large amounts of unused capacity in many industries and high interest rates, which discouraged investment, said Robert Ortner, the Commerce Department's chief economist.
Ortner said that, because economic growth seemed to pick up in the second half of this year and interest rates have declined, "We should get some better performance in investment."
Businesses to some extent overbuilt their plants earlier this year because they anticipated stronger growth than actually occurred, according to Gordon Richards, an economist for the National Association of Manufacturers.
Additionally, many businesses rushed earlier in the year to invest in plant and equipment because they feared that favorable incentives in the tax system would be eliminated under tax-revision proposals, Richards said. As a result, they are not investing now, he said.
As for capital spending next year, the slowdown in new orders "does not auger well," Richards said. If a tax-revision bill is passed, there could be a surge of capital spending by businesses hoping to capture current tax incentives before the new law becomes effective, which would be followed by a sharp drop, Richards said. Spending also will depend on the economy's performance, "and that is up in the air right now," according to Richards.
Economists said that defense orders are a volatile sector of the economy and could rise in coming months as the administration continues its military buildup.
Orders for manufactured goods have increased slowly this year, rising at an annual rate of 3.7 percent since January compared with the 14.8 percent rate in 1984, Commerce said.
Orders for nondefense capital goods, an important gauge of industries' modernization and expansion plans, dropped 7.4 percent in October, following a 6.1 percent increase in September.
Orders for transportation equipment fell 7.6 percent, as orders for aircraft, aircraft parts and shipbuilding declined.