In The News

Factory orders drop; Fed chief pessimistic about near term growth

By Martin Crutsinger - The Associated Press
Posted Apr 3rd 2008 4:45AM

Ben_Bernanke.jpgWASHINGTON — Orders to U.S. factories fell for a second straight month, a worse-than-expected performance that reinforced worries that the risk of recession is rising.

The Commerce Department reported Wednesday that factory orders dropped by 1.3 percent in February, about double the downturn that economists had been expecting. Orders had fallen an even bigger 2.3 percent in January, the largest decline in five months.

The falloff in demand was widespread, with steep declines in orders for motor vehicles, various types of heavy machinery and demand for iron and steel.

Many economists believe a prolonged housing slowdown and credit crunch have already pushed the country into a recession. Federal Reserve Chairman Ben Bernanke, testifying before the Joint Economic Committee on Wednesday, said that the economy could shrink over the first half of this year, his most pessimistic assessment to date.

“It now appears likely that gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly,” Bernanke told lawmakers. Under one rule, six straight months of declining GDP would constitute a recession.

Bernanke said he still expected economic growth to strengthen in the second half of the year but he said, “In light of the recent turbulence in financial markets, the uncertainty attending this forecast is quite high and the risks remain to the downside.”

On Wall Street, stocks turned lower Wednesday as investors worried about another sharp jump in oil prices with crude rising $3.85 per barrel to settle at $104.83. The Dow Jones industrial average fell 48.53 points to close at 12,605.83. The Dow had surged by 391 points on Tuesday.

Aaron Smith, an economist with Moody’s Economy.com, noted that inventories of unsold manufacturing goods have now risen for six straight months, indicating further weakness ahead as factories are forced to cut production to prevent a sizable increase in unwanted stockpiles.

The report on factory orders showed demand falling by 1.1 percent for durable goods, items expected to last at least three years, while orders for nondurable goods, products such as oil and chemicals, fell by 1.5 percent.

The weakness in manufacturing occurred even though orders for commercial airplanes rose by 5.1 percent in February, rebounding from a big decline in January. Orders for motor vehicles fell by 2 percent in February after no gain in January. Automakers are struggling with weak demand in the face of soaring gasoline prices.

Overall, orders for transportation products posted a 1.8 percent rise in February as the strength in commercial and defense aircraft orders as well as higher demand for ships and boats offset the drop in motor vehicles.

Orders for heavy machinery plunged by 12.3 percent in February, the biggest decline since January 2004, while orders for iron and steel fell by 2.3 percent.