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Factories Offer Surprising News

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By EILEEN ALT POWELL, The Associated Press

Published: January 30, 2008

NEW YORK - Orders to factories for big-ticket manufactured goods jumped unexpectedly in December, good news amid signs the U.S. economy may be tipping toward a recession.

Still, analysts said the 5.2 percent growth in orders - while potentially boosting industrial output in coming months - likely came from overseas demand and that domestic growth faces continuing threats from tight credit and mortgage markets that have forced consumers to retrench.

The Conference Board report Tuesday that consumer confidence fell sharply in January on worries about deteriorating business conditions and a weakening job market.

The New York-based business research group said that its consumer confidence index dropped to 87.9 in January from a revised 90.6 in December. That put it back to about where it was in November, when it registered 87.8. January's reading was just a tad below the 88 expected by Wall Street analysts, according to Thomson/IFR.

Meanwhile, a key index that tracks home prices plunged a record 8.4 percent in November.

The drop in the Standard & Poor's/Case-Shiller 10-city composite home price index was the 11th straight monthly decline and the biggest year-to-year drop since a 6.7 percent decrease in October.

Economy Still 'Under Severe Stress'

While acknowledging that the factory orders report was a positive sign, economists worried that it would be misinterpreted as signaling greater strength than exists.

"So make no mistake: The U.S. economy remains under severe stress," said Bernard Baumohl, managing director of the Economic Outlook Group, in a research note. "When you have more than 70 percent of the economy consumers in retrenchment mode and a banking sector shutting down the lending window, the prospects of a recession are still very real."

David Huether, chief economist of the National Association of Manufacturers, also welcomed the orders report as "confirmation for manufacturers that export-led growth is continuing." But he worried that the downturn in housing would hurt the economy.

"This is why immediate action from Capitol Hill on an economic stimulus package is needed to encourage both consumer spending and business investment," Huether said.

The White House and Congress on Thursday announced a joint agreement to work on an economic stimulus program that is expected to include tax rebates for consumers.

That came two days after the Federal Reserve on Jan. 22 cut its short-term interest rate target three-quarters of a percentage point to 3.5 percent to boost the economy.

Additional $30 Billion Auctioned

Fed policymakers began a two-day meeting Tuesday, and many analysts and investors expect an additional rate cut of at least a quarter of a point.

In an ongoing effort to provide relief to cash-strapped financial institutions, the Fed said Tuesday that it had auctioned an additional $30 billion to commercial banks at an interest rate of 3.123 percent.

Through the Fed's four auctions since December, a total of $100 billion in short-term loans has been made available to banks.

The Dow Jones industrial average on Tuesday rose 96.41, or 0.78 percent, to close 12,480.30. The blue-chip index closed near its high of the day.

Broader indexes also rose. The Standard & Poor's 500 index rose 8.34, or 0.62 percent, to 1,362.30, and the Nasdaq composite advanced 8.15, or 0.35 percent, to 2,358.06.

Lynn Franco, director of The Conference Board Consumer Research Center, said in a statement that the consumer confidence survey indicated that consumers in January appeared more pessimistic about the economy.

"Looking ahead, consumers are quite downbeat about the short-term future, and a greater proportion expect business conditions and employment to deteriorate further in the months ahead," she said.

It was unclear how much to read into the data because the survey was taken before the Fed's big rate cut and the announcement of the stimulus program.

The strength in durable goods orders - double what analysts had expected - came from a big increase in demand for commercial aircraft. But even excluding the transportation sector, orders posted a solid 2.6 percent gain.

Despite the strong December, it was a lackluster year. Orders for all of 2007 rose just 0.97 percent after much bigger increases of 6.31 percent in 2006 and 9.45 percent in 2005.

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