Washington, April 2 (Bloomberg) -- U.S. factory orders dropped 1.5 percent in February, the most in five months, adding to evidence the approach of the Iraq war took a toll on manufacturing and the economy. The decrease, reflecting less demand for commercial aircraft, computers and chemicals, followed a 1.7 percent gain in January, the Commerce Department said. Excluding transportation, orders fell 2 percent, the largest drop in a year. Bookings for defense goods surged 27.1 percent, the third rise in four months. The drop in orders caused manufacturing to contract last month for the first time since October. Companies are trimming orders and factories are reducing production because consumer purchases, which account for two-thirds of the economy, stalled in January and February.
``There was a wait-and-see mentality among businesses'' as the war approached, said Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh. Companies probably cut jobs for a second month in March, statistics may show Friday, because ``businesses were still very nervous.'' Manufacturing accounts for one-seventh of the U.S. economy and employs more than 16 million. Economists had expected factory orders to fall 0.8 percent, based on the median of 62 forecasts in a Bloomberg News survey. The decline was the largest since a 2.4 percent drop in September. ``We continue to see a sluggish U.S. economy,'' Herbert Henkel, chairman and chief executive of Ingersoll-Rand Co., said in an interview with Bloomberg Television yesterday. Still, ``I remain optimistic that within the next 18-24 month horizon, we'll see a gradual recovery.''
Stocks Gain
Stocks rose in the broadest rally in more than two weeks as battlefield successes in Iraq fueled optimism the war may end soon, spurring business spending. The Standard & Poor's 500 Index gained 22.42 points, or 2.61 percent, to close at 880.90, and the Dow Jones Industrial Average jumped 215.20 points, or 2.67 percent, to close at 8285.06. Treasuries had their biggest drop in eight days as the benchmark 3 7/8 percent note maturing in February 2013 lost almost a point, pushing the yield up 11 basis points to 3.92 percent. A basis point is 0.01 percentage point. Factory inventories expanded 0.4 percent in February following a 0.1 percent gain in January. With shipments falling, the inventory-to-shipments ratio, a gauge of how long goods sit in warehouses, rose to 1.34 months from 1.32 months in January. The drop in February orders is ``likely setting the stage for a pullback in output in March, especially since inventories began to rise rapidly in February,'' said Jade Zelnik, chief economist at RBS Greenwich Capital in Greenwich, Connecticut.
Durable Goods Orders
The decrease in orders was led by a 1.6 percent drop in bookings for durable goods made to last at least three years, which account for more than half of the report. Orders for commercial aircraft fell 27 percent. Boeing Co., the world's largest aircraft maker, said it received orders for four planes in February, down from 24 the previous month and the fewest since September, according to the company's website. Defense capital goods were 23.3 percent higher in February than the same month last year as the U.S. prepared for war. Raytheon Co. said it will accelerate production of a new version of its Tomahawk cruise missile at the request of the U.S. Navy because supplies of the existing model are being depleted in the conflict. The company currently has orders for 192. Bookings for defense communications equipment surged 14 percent after a 10.3 percent rise. Industrial machinery orders plummeted 29 percent to $2.8 billion. Bookings for computers dropped 17 percent to $3.9 billion.
`Starting to Slide Again'
Orders for non-defense capital goods excluding aircraft, a proxy for business investment in equipment and software, decreased 3.7 percent after increasing 5.2 percent the previous month. Shipments of capital goods, which are used in calculating gross domestic product, declined 3.1 percent after gaining 3.1 percent. ``Things are really starting to slide again,'' said Scott Brown, an economist at Raymond James & Associates in St. Petersburg, Florida. ``A lot of firms are telling us that they don't want to expand in this environment, hire workers, or buy capital equipment.'' Orders for non-durable goods, which include clothing and chemicals, fell 1.4 percent after rising 1.3 percent. The decrease was led by reduced bookings for paper products, which fell 2.3 percent; basic chemicals, which declined 1.6 percent; and plastic and rubber products, which dropped 1.2 percent. Yesterday, the Institute for Supply Management reported that its factory index for March fell to 46.2, the lowest since November 2001 and the first reading in five months below 50, signaling contraction. Orders and production declined. The index fell 9 points from January through March. Personal spending stalled in January and February, the Commerce Department reported last week. It was the first time that spending failed to rise for two straight months since December 1990-January 1991, when the U.S. was in recession during the buildup to the first Gulf War. //www.bloomberg.com