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Durables fall, incomes rise
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May 26, 2000: 11:23 a.m. ET
Orders for durables plunge in April; income gains outpace spending
By Staff Writer M. Corey Goldman
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NEW YORK (CNNfn) - Orders for long-lasting items such as microwave ovens and airplanes posted their steepest monthly drop in 8-1/2 years in April, while personal income grew faster than spending and savings climbed, according to two government reports released Friday.
 Durable goods orders plunged 6.4 percent in April, the Commerce Department said, well below the 0.2 percent decline expected by analysts and the revised gain of 4.5 percent recorded a month before. It was the biggest monthly drop in orders since December 1991. Excluding transportation goods, which tend to be volatile from month to month, orders slipped 6.4 percent, the biggest decline since July 1989.
Personal income, meantime, rose 0.7 percent in April, the Commerce Department reported separately, the same pace as recorded in March and a shade higher than the 0.6 percent increase expected by analysts. Spending rose 0.4 percent, as expected, after a revised 0.6 percent gain in March, while the amount Americans put aside in savings rose to a 0.7 percent pace from a revised 0.4 percent rate in March, Commerce said.
All told, the numbers held some positive indications for financial markets -- that demand both at home and abroad for big-ticket items is slowing from its torrid pace, and that Americans, while earning more, are spending less and putting a bit more away in the bank, a phenomenon the Federal Reserve has been trying to encourage by repeatedly raising short-term interest rates.
Won't stop the Fed
David Blitzer, chief economist with Standard & Poor's, told CNNfn's Before Hours that the numbers, while encouraging, likely won't deter the Fed from raising rates again at its June 27-28 policy meeting and that Fed policy makers probably will raise rates by another half point to slow the rapid pace of the economy. (550KB WAV) (550KB AIFF)
 Steve Wood, an economist with Banc of America Securities in San Francisco, agreed, noting that Fed officials likely still will need more statistical evidence to be convinced of a significant economic slowdown. "The (Federal Open Market Committee) will welcome this report but will need more evidence that the consumer spending slowdown will be sustained over the balance of the year," he said.
For months, U.S. factories have been stepping up production in response to surging consumer demand, an enormous factor behind the resilient economy now into its 10th year of uninterrupted expansion. Consumer spending accounts for more than two-thirds of the economy's total output.
But April's income and spending numbers painted a picture of U.S. households earning and saving a bit more and spending a bit less, a situation the Fed has been encouraging by raising interest rates six times since last June. Most analysts expect Fed officials will raise short-term rates again at their June meeting to slow economic growth and pre-empt inflation.
Of concern to both Fed policymakers and Washington lawmakers has been the country's low personal savings rate and high debt levels, a combination many fear could spur a crisis should stock market volatility continue to reduce individuals' net worth and force them to pay back what they owe.
An end to the tightening?
That's one of several reasons Fed Chairman Alan Greenspan and the central bank's policy-making arm have been raising rates, to discourage consumers and businesses from borrowing more money and injecting that cash into the economy. The Fed last raised its benchmark fed funds rate by a half point to 6.50 percent on May 16, the first half-point hike in more than five years.
 But stock market volatility, rising prices for many goods and services and rising interest rates that make leaving money in the bank more attractive may be starting to have an impact on consumers' penchant to spend.
"We're starting to see the savings rate pick up from near historic levels, which is very encouraging," said Anthony Chan, chief economist with Banc One Investment Advisors in Columbus, Ohio. "Though we don't expect Fed tightening to work overnight, we are starting to see some of the early results of the significant tightening we've seen to date."
A sudden slump in demand for electronic goods sent durable goods orders lower last month. Electronic equipment orders plunged 20.1 percent in April after rising 8.9 percent a month before. The Commerce Department's definition of electronic goods covers a range from appliances and video equipment to semiconductors, circuit boards and resistors.
Plane orders plunge
Orders for aircraft and aircraft parts also contributed to the unexpected decline in durable goods orders. Aircraft maker Boeing Co. (BA: Research, Estimates), the world's biggest, said it received only four orders for commercial aircraft in April compared with 111 in March. Even so, a strike that ended in mid-March skewed the Seattle-based company's numbers, spurring fluctuations in its order and assembly process.
 Non-defense capital goods orders excluding aircraft showed a modest 1.1 percent gain in April, largely on the strength of industrial machinery orders. Unfilled orders for durable goods fell 0.8 percent after rising 1.6 percent in March. Shipments of durable goods fell 0.8 percent after rising 2.5 percent.
As for income and spending, disposable income, or the money left over after taxes, increased 0.7 percent in April after rising at the same pace in March. Paychecks for Census workers as well as higher wages and salaries in the private sector helped boost overall income levels, the report said.
Most of last month's spending increase went to services, Commerce said. Spending on services rose 0.6 percent following a 0.8 percent increase in March. Spending on non-durable goods rose 0.1 percent in April after March's 1 percent increase. Spending on durable goods fell 0.1 percent after a 1.3 percent decline a month earlier. 
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