U.S. factory orders post record monthly drop

Orders to U.S. factories fell in August by the largest amount on record, but the drop was heavily weighed by an expected plunge in volatile aircraft orders.

A key category that tracks business investment plans posted a small increase, offering an encouraging sign that factory production will sustain momentum in the second half of this year.

Orders declined 10.1 percent in August after a record increase of 10.5 percent in July, the Commerce Department reported Thursday. Both months were affected by swings in demand for commercial aircraft, which soared in July only to plummet in August.

Core capital goods, a category seen as a proxy for business investment, managed to rise a slight 0.4 percent in August after a 0.1-percent July dip.

Economists expect businesses to boost spending as they expand and modernize their operations. Business investment was a key source of strength in the second quarter.

Orders for durable goods, items expected to last at least three years, fell a record 18.4 percent in August. The figure reflected a 74.3-percent drop in demand for commercial aircraft. Orders for motor vehicles and parts dropped 5.4 percent, but that weakness was expected to be temporary given the robust sales automakers are experiencing this year.

Orders for non-durable goods, items such as chemicals, clothing and food, edged down 0.4 percent in August following a 0.8-percent July decline.

Excluding transportation, orders would have edged down a tiny 0.1 percent in August. Demand for primary metals such as steel dropped 1.3 percent, while orders for machinery managed a 0.9-percent increase. Orders for computers dropped 15.2 percent, but demand for electrical appliances rose 2 percent.

On Wednesday, the Institute for Supply Management reported that its closely watched barometer of manufacturing performance fell to 56.6 in September from 59 in August. Analysts saw the slowdown as consistent with a recent drop-off in global demand and a rise in the value of the dollar, which makes American goods more expensive overseas.

Still, many economists believe manufacturing has enough momentum to keep the economy growing at a healthy rate above 3 percent in the second half of this year.

The economy has been on a roller coaster so far this year. Gross domestic product contracted at an annual rate of 2.1 percent in the first quarter, the result of a harsh winter that curtailed economic activity. Then pent-up demand by consumers and businesses drove growth to a rapid rate of 4.6 percent in the April-June quarter.

Many economists are looking for more uniformity in the second half of the year, forecasting a rate above 3 percent for both the third quarter and the October-December period. That would be a marked improvement from the sub-par growth rates of around 2 percent that have been logged during the first five years of recovery from the worst recession since the 1930s.