New orders to factories for big-ticket goods fell in May for the second straight month, the government reported yesterday, adding to signs that the U.S. economy cooled a bit in the spring when interest rates and oil prices rose.
Despite that news, analysts said they still expect the Federal Reserve to raise its benchmark interest rate Wednesday because it is too low for an economic expansion that is continuing at a solid, if slightly slower, pace.
Fed officials have repeatedly signaled that they believe they can raise the rate very gradually thereafter -- in small steps spread out over the next year or so -- if the economy does not appear to be overheating and inflation remains tame.
The most recently released economic data boost the odds that Fed policymakers will hold to that position when they meet next week. Reflecting that expectation, bond prices rallied yesterday and yields, which move in the opposite direction, fell.
New orders to factories for long-lasting goods fell 1.6 percent last month, seasonally adjusted, after a 2.6 percent drop in April, the Commerce Department said. Much of the May drop reflected a 4 percent decrease in new orders for motor vehicles and parts, which followed a 3 percent slide in April. But even after excluding transportation equipment, orders declined 0.7 percent, reflecting lower demand for a variety of products, including computers, communications equipment, electrical equipment and appliances.
Combined with other figures, such as the drop in April retail sales and a slower gain in overall consumer spending in April, the report added to the impression that the economy lost some momentum this spring.
The economy grew at a 4.4 percent annual rate in the first three months of the year, according to the Commerce Department's most recent estimate, which is due to be updated today. That pace was fueled in part by the latest federal tax cut and a drop in mortgage rates that triggered another burst of home loan refinancing, both of which put more money into people's hands.
With those propellants running out, and higher oil prices leaving households and businesses with less cash to spend, the economy appears to be expanding at a slower pace in the April-June quarter, economists said.
Wachovia Corp. trimmed its forecast for second-quarter growth to a 3.5 percent annual rate, senior economist Mark Vitner wrote in a note to clients yesterday.
The latest economic figures strengthened analysts' expectations that the Fed will raise its target for the Federal funds rate, which is charged between banks on overnight loans, to 1.25 percent from 1 percent, at a two-day policymaking meeting that ends Wednesday.
Fed Chairman Alan Greenspan, speaking on Capitol Hill less than two weeks ago, reinforced that impression and added that the pace of increases "is very likely to be measured over the quarters ahead" -- providing a phrase that some analysts believe Fed policymakers may adopt in the statement they issue after the meeting.
Policymakers are not sure whether recent price increases will be temporary or signal higher inflation. They do not know whether the recent booming pace of job creation will continue or peter out. They are concerned that Chinese leaders' efforts to cool their overheated economy could ripple through the global economy. And Greenspan highlighted continuing anxieties about the effects on the economy of more terrorist attacks.
Economists also are unsure whether the recent cooling of the economy will mark a pause, or a shift to a slower rate of expansion in the second half of the year.
Durable goods orders declined in April and May after surging the previous two months and rising much of the last year.
Jerry Jasinowski, president of the National Association of Manufacturers, described the decline as "quick breather after a year-long sprint."
"The manufacturing recovery remains on solid footing," he said.
Economists noted other recent signs that the manufacturing sector is gaining strength. Overall U.S. factory production rose 0.9 percent last month after a 0.7 percent increase in April, the Fed reported last week. Manufacturers increased payrolls in May for the fourth consecutive month.
The durable goods report "seems puzzling" compared with the other manufacturing data, said Peter E. Kretzmer, senior economist with Bank of America Corp. But, he said, the figures imply "that the very rapid growth in high-tech production in the past year is set to moderate in results for June and beyond."