U.S. manufacturing mired in soft patch as orders, shipments fall

By Lucia Mutikani

WASHINGTON (Reuters) - New orders for U.S.-made goods fell in April and shipments dropped by the most in two years, indicating continuing weakness in manufacturing activity that could hurt the broader economy.

The report from the Commerce Department on Tuesday added to moderate consumer spending as well as weak home sales, construction and equipment outlays in April in suggesting that economic growth was slowing sharply after a temporary boost from trade, inventories and defense spending in the first quarter.

Some economists believe the dimming economic outlook, which also reflects an escalating trade war between the United States and China, could force the Federal Reserve to cut interest rates this year. The U.S. central bank early this year suspended its three-year rate hiking campaign.

Fed Chairman Jerome Powell said on Tuesday the central bank was closely monitoring the implications of the trade tensions on the economy and would "act as appropriate to sustain the expansion."

"Powell may have opened the door a crack wider to the possibility that the Fed will ratify one or two of the rate cuts the markets have discounted this year," said Chris Rupkey, chief economist at MUFG in New York.

Factory goods orders declined 0.8%, pulled down by softening demand for transportation equipment, computers and electronic orders, and primary metals. Orders increased 1.3% in March.

Economists polled by Reuters had forecast factory orders would fall 0.9% in April. Factory orders rose 1.6% compared to April 2018. Manufacturing, which accounts for about 12% of the economy, is being squeezed by businesses placing fewer orders while working off stockpiles of unsold goods in warehouses.

The sector could see more disruptions to the supply chain after President Donald Trump announced last week that he would impose a tariff on all goods from Mexico in a bid to stem the tide of illegal immigration across the U.S.-Mexican border. The tariff would start at 5% on June 10.

Manufacturers are still digesting the White House's decision in early May to slap additional tariffs of up to 25% on $200 billion of Chinese goods, which prompted retaliation by Beijing.

The trade war, together with the inventory bloat that is concentrated in the automotive sector, could keep manufacturing on the backfoot. A survey on Monday showed a measure of national factory activity dropped to a 31-month low in May, with manufacturers worried mostly about the trade tensions.

BUMPY ROAD AHEAD

"We expect further bumps along the road for manufacturing as a slowing global economy and escalating tariffs on major U.S. trading partners pose headwinds," said Stephen Ciccarella, a senior economist at Moody's Analytics in West Chester, Pennsylvania.

"The supply chains with the U.S. and Mexico are more intertwined than those between the U.S. and China, which would make the spillover effects on the U.S. economy more significant than the 5% tariff would otherwise suggest."

Stocks on Wall Street were trading higher, boosted by Powell's comments. The dollar rose marginally against a basket of currencies, while U.S. Treasury prices fell.

Inventories at factories rose 0.3% in April. The stock of unsold goods has increased in seven of the last eight months. Shipments of manufactured goods fell 0.5% in April, the largest drop since April 2017, after rising 0.2% in March.

The inventories-to-shipments ratio increased to 1.37 from 1.36 in March. Pointing to further weakness in manufacturing activity, unfilled orders at factories slipped 0.1% in April, reversing March's 0.1% rise.

Boeing's move to cut production of its troubled 737 MAX aircraft is also hurting manufacturing.

The economy is broadly slowing despite the lowest unemployment rate in nearly 50 years. The Atlanta Federal Reserve is forecasting GDP rising at a 1.3% annualized rate in the second quarter. The economy grew at a 3.1% rate in the January-March period.

In April, orders for computers and electronic products fell 0.5%, while those for primary metals dropped 1.1%. Machinery orders rose 0.3%. Orders for electrical equipment, appliances and components increased 0.9%.

Transportation equipment orders tumbled 5.9% after rising 6.0% in March. Orders for civilian aircraft and parts plunged 25.2%. Motor vehicles and parts orders fell 1.7%, the biggest drop since July 2017.

The Commerce Department also said April orders for non-defense capital goods excluding aircraft, which are seen as a measure of business spending plans on equipment, declined 1.0% instead of the 0.9% drop reported last month.

Orders for these so-called core capital goods rose 0.3% in March. Shipments of core capital goods, which are used to calculate business equipment spending in the gross domestic product report, were unchanged as previously reported.

Core capital goods shipments fell 0.6% in March. Business spending on equipment contracted in the first quarter for the first time in three years.

"It is likely that real equipment spending will decline again in the second quarter," said Daniel Silver, an economist at JPMorgan in New York.

(Reporting by Lucia Mutikani; Editing by Paul Simao)