NEW YORK (CNNfn) - Orders placed at U.S. factories declined in September, the first drop in five months, as transportation orders dropped for the second month in a row, according to a government report released Wednesday.
Separately, the index of leading economic indicators, a major forecasting gauge, declined in September for the first time in five months due to Hurricane Floyd and fears about interest rate rises, a private research group said
Factory orders fell 0.9 percent in September, the Commerce Department said, almost double the 0.5 percent drop analysts had expected and in contrast to July's 1.3 percent gain. Much of the decline stemmed from a 4.2 percent drop in transportation orders, which followed a 3.9 percent decline in August. Excluding transport, orders fell 0.4 percent.
Even with the steeper-than-expected decline, analysts still expect manufacturing activity to remain robust in the months ahead as demand at home and abroad continues strong. In the third quarter, orders rose 3.9 percent following a 0.2 percent rise in the second quarter; year-to-date orders have risen 5.7 percent, Commerce said.
Muted market reaction
"Although the weakness in this month's report was broad-based, still strong domestic economic activity and improvement in international economic activity is supporting general manufacturing activity," said Stephen Wood, a senior economist at Banc of America Securities in San Francisco.
Bonds gained after the reports as investors concluded the numbers point to slowing growth -- something the Federal Reserve may take into account when it discusses monetary policy in two week's time. Slowing growth typically means less inflation pressure and less need for higher rates.
The Fed has raised rates twice this year in two successive quarter-point moves -- one in late June, the other in early August. The so-called Fed funds rate -- the target rate banks can lend money to each other overnight -- is now 5.25 percent. The rate sets the trend for consumer and business lending.
To get an even better read on whether it'll happen a third time, investors are now awaiting numbers on October employment growth, due out Friday. Analysts polled by Reuters anticipate that 317,000 jobs were added to the economy last month, leaving the jobless rate unchanged at 4.2 percent.
Watching for wages
Those numbers are expected to provide a better indication of whether strong economic growth is fueling higher wages and faster inflation -- something most analysts and investors believe will lead to another Fed interest-rate increase at the committee's Nov. 16 policy meeting.
Wage price pressure is probably the most predominant thing that the Fed is concerned with," said Art Hogan, chief market strategist at Jeffery & Co. in Boston. "If the high levels of employment aren't kept up with the high levels of productivity gains that we have been making, (the Fed) will probably need to do something pro-active and that would probably mean 25 basis points now and then something in the first quarter of next year."
Durable goods orders, big-ticket items meant to last a minimum of three years, slipped 1.3 percent in September. Orders for industrial machinery and equipment dropped 0.7 percent while demand for nondurable products declined 0.4 percent. Partially offsetting the declines was a 1.3 percent gain in orders for electronic and electrical equipment.
The inventory-to-shipments ratio -- the time it takes stock sitting on factory shelves to ship out -- rose to 1.30 months in September from a record-low 1.28 months in August. And unfilled orders -- those on the books yet to be processed -- rose 0.4 percent following August's 0.5 percent gain.
Leading indicators slip
Also Wednesday, the Conference Board, a New York research organization, said its index of leading economic indicators slipped 0.1 percent, a little more than the flat reading economists had expected. The index was revised to unchanged in August after being initially reported down 1 percent. The index is meant to forecast the economy's progress six to nine months out.
"Severe weather conditions and uncertainty over interest rates may help explain why the rise in the indicators was cut short," said Conference Board economist Ken Goldstein.