Durable goods orders prove Fed right

Journal Record, The (Oklahoma City), Mar 27, 1997

WASHINGTON (AP) -- Orders for big-ticket manufactured items rose unexpectedly to an all-time high in February, providing some after- the-fact justification for the Federal Reserve's interest-rate increase.

Spurred by demand for communications and other electronic equipment, durable goods orders to U.S. factories increased 1.5 percent last month to a seasonally adjusted $178.3 billion, the Commerce Department said Wednesday.

Many analysts had anticipated a 0.5 percent decline. The rise came on top of a revised 4.1 percent gain in January, the best in four months and even better than the 3.6 percent originally reported. "This is unquestionably a strong report. So, yes, the Fed is on the right track," said economist Kurt Karl of The WEFA Group in Eddystone, Pa. Durable goods -- long-lasting items ranging from aircraft to computers -- are a key barometer of the nation's manufacturing strength. Wednesday's report bolstered economists' belief that the economy is growing briskly in the first quarter, contrary to their earlier prediction that it would slow from the fourth quarter of 1996. Citing "persisting strength in demand," the Federal Reserve on Tuesday raised short-term interest rates by a quarter percentage point. Most analysts believe there will be at least one or two more increases, especially if growth, in the Fed's words, "is progressively increasing the risk of inflationary imbalances." The Commerce Department report showed that orders are piling up faster than factories can ship goods. Unfilled orders rose 1.1 percent, the ninth increase in 10 months. A growing backlog of orders suggests manufacturers will have to increase production and manpower to meet demand. "Things are speeding up, which is exactly what the Fed is worried about. We can expect some more moves from (Fed) Chairman (Alan) Greenspan," said Karl, who predicted the Fed would push rates up an additional half percentage point by July. But economist Stuart G. Hoffman of PNC Bank Corp. in Pittsburgh said some of the increase in new orders will ease inflationary pressures by enhancing factories' ability to produce. For instance, orders for capital goods -- excluding the volatile defense and transportation sectors -- rose 6.9 percent in February and 3.2 percent the month before. "I don't view that as inflationary," Hoffman said. "If businesses add to plant and equipment spending ... that's actually a positive for adding to the economy's productive capacity, which already is growing at one of the most rapid rates in decades." Orders for electronic equipment, including computers, rose 7.4 percent in February on top of a 17.9 percent gain the month before.Orders climbed 2.2 percent for industrial machinery, the third consecutive increase. However, the transportation category fell 3.6 percent, with decreases in all components except railroads. Primary metals such as steel edged 0.5 percent lower, the first decline since October.