Durable Goods Orders Decline Sharply; US GDP Growth Revised Down

U.S. manufacturing is struggling as businesses brace for the year-end "fiscal cliff" in an economy that entered the third quarter with less momentum than thought, data released Thursday showed.

New orders for long-lasting manufactured goods plunged 13.2% in August, the Commerce Department said, the sharpest drop since January 2009 when the economy was deep in recession.

The decline was led by the volatile transportation equipment sector, hit by Boeing aircraft order cancelations. Excluding transportation, durable goods orders were down 1.6%.

Durable Orders Wither

"Durable orders have withered this year due to defense spending cuts, the end of accelerated depreciation, the recession in Europe, the emerging markets slowdown and the fiscal cliff," said Chris Low at FTN Financial.

The data highlighted a lackluster economy 40 days before President Barack Obama faces off against Republican rival Mitt Romney in a Nov. 6 election dominated by voters' worries about high unemployment and slow growth.

The so-called "fiscal cliff," automatic tax increases and spending cuts at year-end, may throw the world's largest economy back into recession, economists say.

Facing that uncertainty, businesses have been reluctant to hire and invest, hoping that a bitterly divided Congress will avert the fiscal tightening.

Economic Growth Revised Downward

Other economic data released Thursday were also downbeat.

The Commerce Department revised second-quarter economic growth to an annual rate of 1.3% from the prior estimate of 1.7%.

Much of the revision was due to the effects of the Midwest drought that reduced farm inventories, a temporary factor, but consumer spending, exports and business investment spending also were lower than previously thought.

It was the slowest growth since the first quarter of 2011, and followed a 2% pace in the first quarter.

"The slowing came primarily from a decline in durable goods consumption and fixed investment," said Scott Hoyt at Moody's Analytics, calling the GDP growth "disappointing."

"The economy overall has only weak forward momentum," said Nigel Gault at IHS Global Insight, predicting 1.5% gross domestic product growth for the third quarter.

"The news from housing may be improving, but manufacturing is struggling now, because of weakness in exports and business fixed investment," he said.

Pending home sales fell in August from July, but after reaching a two-year peak and were still more than 10% higher than a year ago, the National Association of Realtors reported.

The depressed housing market has been showing signs of recovery recently, six years after a price bubble collapsed.

Housing Prices Show Gains

On Tuesday, the closely watched S&P/Case-Shiller 20-city home price index jumped 1.6% in July, the third straight month of gains.

Responding to the economy's slowdown, the Federal Reserve announced on Sept. 13 a new $40 billion-a-month bond-buying program aimed at lowering long-term interest rates to help growth and boost employment.

Moody's Hoyt pointed out that tepid growth means unemployment would remain stuck above 8%, where it has been since last October, for some time.

"Businesses are reluctant to hire because of the threats posed by the approaching fiscal cliff in Washington, concerns about a potential breakup of the eurozone, and high energy prices," he said.