US factory orders drop 1 per cent in May; demand in key investment category also down

WASHINGTON – Orders to U.S. factories fell in May by the largest amount in three months, while a key category that signals business investment plans dropped for a second month.

Factory orders declined 1 per cent in May from April, when orders retreated 0.7 per cent, the Commerce Department reported Thursday. Orders in a category that serves as a proxy for business investment were down 0.4 per cent.

Much of the weakness in May reflected a big 35.3 per cent fall in demand for commercial aircraft. But even outside of the volatile transportation category, orders were up only a tiny 0.1 per cent. The lacklustre showing suggests that manufacturing is still struggling with challenges such as lower energy prices and a strong dollar, which dampens exports.

Durable goods, items expected to last at least three years, dropped 2.2 per cent in May, even weaker than a preliminary report last week that had estimated a 1.8 per cent drop. Orders for nondurable goods edged up a slight 0.2 per cent.

American factories have struggled this year because a strong dollar has made U.S. goods more expensive overseas, hurting American exports. Falling energy prices have also trigged sharp cutbacks in investment spending by oil companies.

Those factors, combined with an unusually harsh winter, sent the economy into reverse in the January-March quarter. But economists are optimistic that economic activity rebounded in the April-June quarter to growth of around 2.5 per cent and will strengthen further in the second half of this year.

They expect continued solid gains in employment will boost household incomes and spur stronger consumer spending, which accounts for 70 per cent of economic activity. A separate report Thursday showed that the labour market created a solid 223,000 jobs in June, and the unemployment rate dropped to a seven-year low of 5.3 per cent.

Giving hope that manufacturing prospects are brightening, the Institute for Supply Management reported Wednesday that its gauge of manufacturing activity rose to 53.5 in June, up from 52.8 in May. The June reading matched January’s level for the highest this year, and it offered evidence that manufacturing growth has accelerated over the past two months. Any reading above 50 signals expansion.