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Lower oil prices squeezing U.S. manufacturing sector

Some economists worry that slowdown could extend into 2016

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By Lucia Mutikani, Reuters

WASHINGTON — New orders for long-lasting U.S. manufactured goods in December recorded their biggest drop in 16 months as lower oil prices and a strong dollar pressured factories, the latest indication that economic growth braked sharply at the end of 2015.

Despite the slowdown in growth, which was acknowledged by the Federal Reserve on Wednesday, the labor market remains on solid ground. First-time filings for jobless benefits retreated from a six-month high last week, other data showed on Thursday.

Economists have expressed worries that the energy sector slump and drag from a strong dollar are spilling over to other parts of the economy, which would lead to continued weakness in early 2016.

“U.S. companies are cutting investment sharply, and the key worry is that it seems to be spreading beyond the oil sector and in the meantime consumers are missing in action, not able to offset the huge drag from the energy sector,” said Thomas Costerg, a U.S. economist at Standard Chartered Bank in New York.

The Commerce Department said durable goods orders plunged 5.1 percent last month, the biggest drop since August 2014, after slipping 0.5 percent in November. The decline was generally broad-based, with orders for transportation equipment plunging 12.4 percent and bookings for non-defense aircraft plummeting 29.4 percent.

The drop in aircraft orders is surprising as Boeing received orders for 223 aircraft in December, up from 89 planes the prior month, according to information posted on its website.

Economists had forecast durable goods orders falling only 0.6 percent last month. Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, fell 4.3 percent in December, the largest drop in 10 months. These so-called core capital goods orders fell 1.1 percent in November. The decline in orders for both durable and capital goods adds to weak data on retail sales, industrial production, exports and business inventories, suggesting the economy slowed sharply in the fourth quarter.

Apart from the buoyant dollar and spending cuts by energy firms bruised by the slump in oil prices, the economy has been blindsided by anemic demand overseas and business efforts to trim an inventory overhang. The growth outlook has been dimmed by the recent stock market sell-off.

According to a Reuters survey of economists, the government is expected to report on Friday that fourth-quarter gross domestic product increased at a 0.8 percent annual rate after notching a 2 percent pace in the third quarter. There is, however, a risk that output contracted in the fourth quarter.

The U.S. dollar extended losses against the euro after the data and was down against a basket of currencies. Stocks were largely flat as were prices for U.S. government debt.

DOUR REPORT

The Fed said on Wednesday “economic growth slowed late last year” and noted that business fixed investment has been increasing at a “moderate” pace in recent months.

The U.S. central bank left its benchmark overnight interest rate unchanged and said it was “closely monitoring global economic and financial developments” to assess their impact on the U.S. labor market and inflation.

Economists said the dour durable goods orders report could heighten the Fed’s concerns about the impact of global headwinds and the fallout from the dollar, which has gained 11 percent against the currencies of the United States’ main trading partners since last January.

“While some of this slowdown is likely to be reversed in coming quarters, it will continue to argue for caution at the Fed about whether the economy can handle a further tightening in monetary policy in the near term,” said Millan Mulraine, deputy chief economist at TD Securities in New York.

The Fed raised rates in December for the first time in nearly a decade.

Weak oil prices have eroded the profits of energy companies, forcing oil field service firms like Schlumberger and Halliburton to cut capital spending budgets.

Oil prices have dropped more than 60 percent since mid-2014.

Pointing to weak business spending in the fourth quarter, shipments of core capital goods — used to calculate equipment spending in the GDP report — fell for a third straight month in December. Unfilled core capital goods orders declined 1.0 percent, the biggest drop in nearly six years. In a second report, the Labor Department said initial claims for state unemployment benefits fell 16,000 to a seasonally adjusted 278,000 during the week ended Jan. 23. The drop almost reversed the prior two weeks’ increases.

It was the 47th straight week that claims remained below the 300,000 mark, which is associated with strong labor market conditions. That is the longest stretch since the early 1970s.

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