The sharpest one-month drop in factory orders in 15 years masks several special factors and some underlying strength in Midwest manufacturing, economists said Tuesday.
Factory orders fell 5.4 percent in January, the biggest monthly retreat since a 7 percent slide in December 1974, the Commerce Department said. About one-third of the decline was concentrated in autos, one-third in aircraft and one-fifth in shipbuilding and tanks.
”The auto industry and its suppliers were hit by plant closings in January, but some of those plants have begun to reopen,” said David Allardice, economist with the Federal Reserve Bank of Chicago. ”The impact has been felt more in Michigan and Indiana.”
For the region as a whole, he noted, ”The auto industry now accounts for only 10 or 11 percent of economic activity, versus 15 percent in the late 1970s.”
While the Midwest economy isn`t booming, 1990 should see an acceptable growth rate, Allardice said. He noted a strong retail sales volume, an uptick in steel orders, some improvement in construction, metal-cutting tools and capital goods and relatively good farm equipment sales.
Not so optimistic was Diane Swonk, economist at First National Bank of Chicago, who called 1990 a ”belt-tightening” year for the industrial sector. She cited a slowdown in exports resulting from an overvalued dollar and a cutback in capital spending because of high interest rates. However, she believes a falling dollar and declining interest rates will set the stage for a rebound in 1991.
With the services sector still expanding, there is no reason to expect that the economy will fall off the cliff, at least until more evidence of weakness is seen in manufacturing, said Michael Drury, economist with Boston Co. Economic Advisers.
”If I was in the Midwest, I would not be thrilled, but I would not be going crazy at this point,” Drury said.
The threat to the capital goods sector is that corporate profits are
”absolutely miserable,” he said.
When earnings are squeezed, companies opt to keep shareholders happy with dividends and cut back on capital outlays and research and development, Drury said.
”I think this means the Midwest economy will go through a kind of softening process, but not as bad as the Northeast,” he said.
One Midwest-centered industry strongly dependent on autos is machine tools. Patrick McGibbon, a Commerce Department analyst, estimated that 40 to 50 percent of orders for machine tools that cut or form metal come from the auto industry. He projected flat domestic demand this year followed by a pickup in 1991, prompted partly by stricter fuel-economy and emission-control standards expected to be imposed on carmakers.
Orders for durable goods, those designed to last at least three years, fell 10.5 percent in January, and 85 percent of that decline was accounted for by transportation orders. Excluding transportation, factory orders slipped 1 percent.
A steep drop in commercial aircraft orders followed a sharp increase after a November settlement of a strike against Boeing Co. Boeing has reported increased orders in February.
Auto plants closed to reduce burdensome inventories have resumed production, and output increased 30 percent in February. Auto sales, however, were weak in the most recent reports.
Another special case was communications equipment. Orders plunged 50 percent in January following a 50 percent jump in December after the end of a phone workers strike in the Northeast.
”Take out all the transportation and communications equipment and what you are left with between last September and January is no change in orders,” Drury said. ”It basically means that manufacturing is seeing no rise in orders and no decline outside the auto industry. It suggests that
manufacturing stays lackluster and is no boost to the economy.”
