Orders for U.S. durable goods unexpectedly dropped in June and inventories climbed at the slowest pace in a year, evidence that companies lost confidence in the strength of the recovery as the second quarter ended. Bookings for goods meant to last at least three years fell 2.1 percent after a 1.9 percent gain the prior month that was smaller than last reported, the Commerce Department said today in Washington. The median forecast of 76 economists surveyed by Bloomberg News projected a 0.3 percent increase. Orders excluding transportation equipment rose less forecast and demand for business equipment dropped. Manufacturers face a slowdown in consumer spending just as they were poised to rebound from the parts shortages caused by Japan’s earthquake, indicating production may cool. Employers are also cutting back on hiring, which may further temper household demand, which accounts for 70 percent of the economy. “There’s really no reason for companies to increase production or increase hiring, and that’s going to lead to a very stagnant growth environment for quite some time,” Lindsey Piegza, an economist at FTN Financial in New York, said before the report. “We’re still in a very tepid recovery. Japan still is a lingering drag on the number because certain sectors are not back to full capacity.” Estimates in the Bloomberg survey ranged from a decline of 1.9 percent to a gain of 1.9 percent. The Commerce Department revised the May gain down from a previously reported 2.1 percent advance. Ex-Transportation Orders excluding volatile transportation equipment, like commercial aircraft, increased 0.1 percent after a 0.7 percent gain, the Commerce Department said. Demand for transportation gear dropped 8.5 percent, countering industry data. Boeing Co. (BA), the largest U.S. maker of aircraft, said it received orders for 48 airplanes in June, up from 27 the prior month. Industry data, nonetheless, may not correlate precisely with the government statistics on a month-to-month basis because it doesn’t take into account the prices. Orders for non-defense capital goods excluding aircraft, a proxy for business investment in items like computers, engines and communications gear, decreased 0.4 percent after rising 1.7 percent the prior month. The drop indicates companies were scaling back their investment plans. Shipments of non-defense capital goods excluding aircraft, used in calculating gross domestic product, increased 1 percent after rising 1.7 percent. Inventory Slowdown The positive news from shipments was countered by a slowdown in stockpiling. Inventories climbed 0.4 percent in June, the smallest gain since March 2010. Recent reports have sent conflicting signals about U.S. factories, a leader in the economic recovery. While restraints from Japan’s earthquake and higher raw material costs earlier in the year may be wearing off, consumer demand has slowed as Americans’ employment prospects waned. The Institute for Supply Management’s factory index rose in June for the first time in four months, supporting the Federal Reserve’s forecast that the economy will strengthen in the second half of 2011 as “factors that are likely to be temporary” subside. Factory production, on the other hand, was unchanged in June as auto and business equipment output declined, Fed figures showed July 15. The so-called Empire State Index, which covers New York, northern New Jersey and southern Connecticut, also indicated manufacturing in that region contracted in July for a second straight month. Not ‘Robust’ “We’re not looking at robust recovery period here, but through thick and thin, it’s being sustained,” Bradley Holcomb, chairman of the Institute for Supply Management’s factory survey committee, said during a July 1 conference call with reporters. “Everybody’s cautious.” Xerox Chief Executive Officer Ursula Burns said the temblor that struck Japan in March and hurt the company’s suppliers will affect the provider of printers and business services in the second and third quarters. Nonetheless, Xerox is “already seeing significant improvement” and expects to return to normal operations in the fourth quarter, she said. “Let me be clear: Demand is not the problem here,” Burns said in a July 22 call with analysts. “This is a supply issue. The second quarter impact was expected and created a backlog for orders taken in the quarter, orders that we’ll be filling during the balance of the year.” The Norwalk, Connecticut-based company reported a 41 percent increase in second-quarter profit after reducing costs and boosting revenue from services. To contact the reporter on this story: Alex Kowalski in Washington at akowalski13@bloomberg.net To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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