U.S. DATA POINT TO CAPITAL SPENDING SLOWDOWN
A surprise 7.5 pct drop in U.S. January
durable goods orders points to a slowdown in capital spending
that could presage lackluster real growth in the U.S. economy
in the first quarter of 1987, economists said.
    With total orders, excluding the volatile defense sector,
falling a record 9.9 pct, economists agreed that the report
painted a bleak picture for the U.S. economy.
    But they stressed that the 1987 tax reform laws may be a
primary factor behind the drop in orders for business capital
investment.
    "It's a rather gloomy outlook for the economy, said David
Wyss of Data Resources Inc. "I'm particularly impressed by the
19.7 pct drop in non-defense 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 14.8 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.
    "It's more expensive to invest than it used to be, so
people just aren't doing it as much," Wyss said.
     Increases in durable goods orders at year's end reinforced
the view that businesses anticipated the changing tax laws,
economists said.
    November durable goods orders rose 5.1 pct and December's
increased 1.5 pct, revised upwards from a previously reported
0.9 pct.
    But most acknowledged that the huge January drop was caused
by more than tax reform.
    "The wash-out 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 0.6 pct, but in December they
fell 0.6 pct and in January 0.7 pct, he said.
    "It suggests orders in the pipeline are depleting, which
may quickly translate to a drop in production," Midland
Montagu's Maude said.
    Wyss cautioned that too much should not be made of
January's 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 57.7 pct decline in
December.
    He also noted that there was a 6.9 pct drop in January
shipments, compared with a 5.4 pct rise in December.
    "Given these numbers, there's no reason for the Fed to
tighten," Data Resources' Wyss said.
    "But there's 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
aren't talking recession or Fed easing now, but the Fed will
have to ease to ensure global growth."
 Reuter
