Fresh evidence of an economic pause ... but not the start of recession
Fresh evidence of an economic pause ... but not the start of recession By Martin Crutsinger ASSOCIATED PRESS 1:32 p.m. April 27, 2005
WASHINGTON – A deep drop in orders for big-ticket manufactured goods provided fresh evidence Wednesday that the economy slowed last month as energy prices rose.
At least for now, the new "soft patch" is being viewed as temporary and not the start of something more serious like a recession. But analysts warned that if anything unexpected like a further surge in energy costs could spell trouble for an economy already facing rising interest rates.
The Commerce Department reported that orders for durable goods plunged 2.8 percent in March. It was the biggest drop in 2½ years. It left no doubt, analysts said, that the economy is going through a significant slowdown as consumers and businesses, jolted by a new surge in energy prices, cut back on their purchases.
"The economy clearly paused last month and the pause was much broader and more pronounced than we had expected," said Mark Zandi, chief economist at Economy.com. "March was an awfully bad month."
In addition to weakness in factory orders, payroll employment showed the smallest gain in eight months and retail sales were disappointing. The stock market has also taken its lumps as investors have grown worried about the possibility, though remote, of a return to the stagflation of the 1970s, where soaring energy costs drive inflation higher as economic growth stalls.
The weakness so far has caused economists to slash their estimates for overall growth in the first quarter to perhaps as low as 3 percent, down sharply from the 4.4 percent increase in the gross domestic product turned in for all of 2004.
Before the string of weaker-than-expected reports, some analysts were forecasting that first quarter growth could come in as high as 4 percent. The government will release its first look at GDP for the January-March period on Thursday.
The 2.8 percent drop in new orders for durable goods – items expected to last three or more years – was the biggest decline since a 6 percent plunge in September 2002. It also marked the third consecutive setback as orders fell by 0.2 percent in February and 1.2 percent in January. Orders haven't fallen for three straight months since the summer of 2001, when the country was in the last recession.
The weakness was widespread, led by a 7.8 percent decline in transportation, reflecting big drops in demand for civilian and military aircraft and a smaller decline in motor vehicles. Excluding the volatile transportation sector, orders were also down, dropping 1 percent, the second monthly decline.
"The March decline was as broad as it was deep with orders falling in machinery, computers, fabricated metals, motor vehicles and aircraft," said David Huether, chief economist for the National Association of Manufacturers.
Huether said American companies are currently sitting on an unusually high $1.2 trillion in cash. They could be investing that money in new plants and equipment, "but uncertainty about many key policies that impact economic growth ... are keeping investors on the sidelines," he said.
Other economists said energy prices will be a key influence on whether the current slowdown proves to be temporary or more severe. A big jump in energy prices last year created what Federal Reserve Alan Greenspan labeled a "soft patch" in the late spring and summer as consumers, who account for two-thirds of total economic activity, cut back on spending in areas outside of energy.
Crude oil prices hit a record high of $57.27 per barrel in early April but retreated to around $52.40 per barrel in trading Wednesday.
David Wyss, chief economist at Standard & Poor's in New York, said that if oil prices continue declining, the economy should pick up, but he stressed that energy was the wild card in the forecast.
"My guess is that things will bounce back given that energy prices seem to be stabilizing," he said. "But we have said that before and been proven wrong. There is no guarantee that energy prices will stay stable."
Other analysts said that the Federal Reserve, which has been gradually raising interest rates since last June to keep inflation from getting worse, would likely decide to take a pause in their credit tightening if the current slowdown becomes more severe.
But for now, analysts said they were still expecting another quarter-point rate increase when the central bank meets next Tuesday.
Market Data 
Markets 
AI
