U.S. factory orders see 0.6 percent gain in May

WASHINGTON -- Orders to U.S. factories turned in the slowest performance in three months in May as a surge in demand for commercial aircraft was not enough to offset weakness in autos, heavy machinery and steel.

Factory orders rose by 0.6 percent in May, less than half the gains turned in during April and March, the Commerce Department reported Wednesday. It was the poorest showing since factory orders had fallen by 0.4 percent in February.

Analysts said the figures for the past three months have been inflated by big increases in the cost of refined petroleum and related products such as chemicals, which have been soaring because of the rising cost of global oil prices.

Oil hit a new record on Wednesday, climbing to above $144 per barrel. Global Insight, a major economic forecasting firm, said it was boosting its forecast for how high oil will go this year, predicting that West Texas intermediate crude will hit $160 a barrel in December, up from its previous forecast that oil would close out this year at $124 per barrel.

Nariman Behravesh, Global Insight's chief economist, said that his firm had decided to revise its oil forecast higher in light of the sustained runup in prices that has already occurred and a belief that global demand and speculation would keep prices at elevated levels for some time to come.

The expectation of a more prolonged and costly jump in oil plus continued weakness in housing will mean greater downward pressure on the overall economy, Behravesh said.

The economy so far has managed to stay in positive territory for growth, thanks in part to $106.7 billion in economic stimulus checks that are now being mailed out. The gross domestic product grew at an annual rate of 1 percent in the first quarter. Behravesh predicted the just-completed April-June quarter would show an even stronger growth rate of 1.8 percent followed by GDP growth of 1.6 percent in the July-September quarter, when the economy will still be feeling the positive effects of increased spending from the stimulus payments.

But Behravesh said growth was likely to decline at a 1.7 percent rate in the final three months of this year and decline at a 0.7 percent rate in the first three months of next year. A standard definition of a recession is two consecutive quarters of negative GDP.

"This slowdown has got a ways to go because we haven't hit bottom yet on housing and this oil shock is going to get worse before it gets better," Behravesh said.

On Wall Street, stocks gave up a brief rally on Wednesday and resumed their sell-off as investors expressed disappointment with the continued surge in oil prices and the weak showing from factory orders.

Economists are watching to see how big an impact the overall economic slowdown will have on manufacturing, which has been hurt by troubles in the auto industry and housing-related industries. That weakness has been offset to some extent by strength in exports, which have continued to rise as American manufacturers have benefited from a weak dollar, which makes their products more competitive overseas.

The Institute for Supply Management's closely watched gauge of manufacturing activity released on Tuesday showed a rise to 50.2 in June, just above the 50-point level that signals expansion in the manufacturing sector. The index had declined for four consecutive months.

The orders report showed that demand for durable goods, items expected to last at least three years, were flat in May while demand for nondurable goods, products such as food and petroleum, rose by 1.2 percent.

Transportation orders rose by 2.5 percent, reflecting a big 10.3 percent surge in demand for commercial aircraft. That helped to offset a 1.6 percent drop in demand for motor vehicles. Automakers have been battered by soaring gasoline prices, which have cut into demand for once-popular trucks and sport utility vehicles. Ford, General Motors and Chrysler all reported big declines in June sales.

The factory orders report showed that demand for machinery was down by 5 percent in May, reflecting big decreases in orders for construction machinery, mining equipment and industrial machinery.

Orders for primary metals including steel were off by 2 percent, but orders for computers and electronic products rose by 2.9 percent.