Amadeusz Juskowiak

Us data point to capital spending slowdown

A surprise 75 pct drop in US January durable goods orders points to a slowdown in capital spending that could presage lackluster real growth in the US economy in the first quarter of 1987 economists said

With total orders excluding the volatile defense sector falling a record 99 pct economists agreed that the report painted a bleak picture for the US economy

But they stressed that the 1987 tax reform laws may be a primary factor behind the drop in orders for business capital investment

Its a rather gloomy outlook for the economy said David Wyss of Data Resources Inc Im particularly impressed by the 197 pct drop in nondefense capital goods orders because it may be a sign that businesses are reacting more adversely to tax reform than we thought

The Commerce Department pointed out that a record 148 pct decline in new orders for machinery was led by declines in office and computing equipment orders

Economists said the drop in computer orders may have been a response to the lengthening of depreciation schedules and the end of the investment tax credit under the new tax laws

Its more expensive to invest than it used to be so people just arent doing it as much Wyss said

Increases in durable goods orders at years end reinforced the view that businesses anticipated the changing tax laws economists said

November durable goods orders rose 51 pct and Decembers increased 15 pct revised upwards from a previously reported 09 pct

But most acknowledged that the huge January drop was caused by more than tax reform

The washout that took place in January was far greater than the actual gains that took place in November and December said Bill Sullivan of Dean Witter Reynolds Inc The economy has a weakening bent to it early in the year

The report definitely points to very sluggish capital spending over the next couple of quarters said Donald Maude of Midland Montagu Capital Markets Inc

Maude pointed to a continuing decline in order backlogs as evidence that the outlook for new orders is not improving In November order backlogs rose 06 pct but in December they fell 06 pct and in January 07 pct he said

It suggests orders in the pipeline are depleting which may quickly translate to a drop in production Midland Montagus Maude said

Wyss cautioned that too much should not be made of Januarys report given that other reports have reflected strength

But he acknowledged that the decline occurred despite a 51 pct rise in defense orders compared with a 577 pct decline in December

He also noted that there was a 69 pct drop in January shipments compared with a 54 pct rise in December

Given these numbers theres no reason for the Fed to tighten Data Resources Wyss said

But theres no reason to ease unless we see more numbers like this The Fed will wait and see he added

Sullivan predicted the Fed will ease by Easter People arent talking recession or Fed easing now but the Fed will have to ease to ensure global growth