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COOLING ECONOMY, HOT MARKET : Big-Ticket Items : Plunging Orders May Lead to Layoffs

June 24, 1989| From Associated Press

WASHINGTON — Orders for big-ticket factory goods in May plunged at the steepest rate in 10 months, the Commerce Department said Friday, raising the prospect of layoffs at manufacturing plants.

In a second report indicating the economy is running out of steam, the department said Americans' income grew at the slowest pace since September.

Orders for durable goods--items ranging from toasters to tanks--fell 4.2% last month, to a seasonally adjusted $124.0 billion, the department reported. That was the largest decline since July, 1988.

Economists monitor the orders as a measure of the industrial sector's health and to gauge the impact of interest rates on the economy. Persistent weakness is liable to lead to layoffs at manufacturing plants.

"It means fewer people will be needed to make things, whether it's planes or cars or washing machines," said economist Cynthia Latta of Data Resources Inc. in Lexington, Mass.

In the other report, the department said American's personal income and personal spending both rose a lackluster 0.3% last month, not even keeping up with inflation.

It was the weakest income number since September and worst spending figure since October.

Consumer spending represents two-thirds of the U.S. economy, and analysts closely monitor fluctuations in both spending and income as a barometer of the economy's overall health.

The gain in Americans' income to a seasonally adjusted annual rate of $4.39 trillion was the slowest since September, the department said. The rise in personal consumer spending to an annual rate of $3.44 trillion was the weakest since October.

If the rising cost of living is factored out, both spending and income actually declined in May. Economist Allen Sinai of the Boston Co. called the report "almost recession-like."

"Consumer spending, adjusted for inflation, normally keeps going up, so this is very weak," he said.

However, economic consultant Michael K. Evans of Washington said spending growth had paused temporarily because consumers were forced to pay higher-than-expected tax bills in April and higher gasoline and food prices in April and May.

Disposable, or after-tax, income surged 1.4% in May after falling 0.7% in April. Tax payments took a larger-than-expected bite out of income in April and returned to a more normal level in May.

Durable-goods orders have fallen in three of the last five months and their level remains $5.9 billion below the December high of $132.1 billion.

At the same time that business is dropping off, manufacturers are being squeezed by higher energy and labor costs, Sinai said.

"Are we going to have layoffs? Yes. A big round of layoffs? I would doubt it, not soon anyway, but by 1990, I wouldn't be surprised," he said.

The unemployment rate, in part reflecting weakness in manufacturing, has risen to 5.2% last month, up from a 15-year low of 5% in March.

However, William C. Dunkelberg, dean of Temple University's business school, pointed out that the backlog of unfilled orders remains high, at $467.6 billion, up 0.1% from April. That will keep factory workers busy enough to cushion the effect of lagging orders.

"I don't think it's anything too scary at this point," he said. "If orders were to continue to deteriorate at this pace, obviously we'd eat up that backlog pretty fast, but I don't think they will."

Friday's economic reports are consistent with other recent evidence that the economy is slowing in response to a year-long campaign by the Federal Reserve Board to fight inflation with higher interest rates.

Durable goods are particularly sensitive to interest rates because consumers must usually borrow to buy them. Recently, the Fed has eased monetary policy slightly in response to signs of sluggishness.

Evans said the central bank likely will be cautious about loosening further. But, he said, "if we get another month of numbers like these, the Fed is going to ease."

Analysts were less alarmed by the May report than they might have been because orders had surged 3.2% in April and because May was heavily influenced by a sharp decline in orders for aircraft and parts.

Excluding the volatile transportation sector, which swings widely from month to month, orders fell a more moderate 2.1% in May after rising 4.5% in April. Excluding military purchasing, which is also volatile, orders declined 3.9% in May after a 5.1% rise a month earlier.

Nevertheless, orders were down across all sectors last month.

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