Durable Goods Orders Hit Record Sharp Increase Attributed Primarily To Sales Of Aircraft

Durable goods orders jumped to record levels in May, but the rise was due mainly to aircraft sales and several analysts said they still did not expect a rise in interest rates next week.

Orders shot up 3.3 percent to a seasonally adjusted $171.8 billion, highest since the government began keeping track in 1958, the Commerce Department said Wednesday.

The advance was the largest since a 5.1 percent gain last August and well above analysts’ expectations.

“If you look underneath … most of (the durable goods increase) was from the volatile commercial aircraft category,” said Sung Won Sohn, chief economist for Norwest Corp. in Minneapolis. “The rest of it is fairly modest. It doesn’t indicate booming economic conditions lie ahead.”

Analysts are divided over whether Federal Reserve policy-makers will raise short-term interest rates at their meeting next week to keep the economy from overheating and building inflationary pressures.

“I expect the (Federal Open Market Committee) to stand pat,” Sohn said. “But I do think they may decide to take out an insurance policy … at the Aug. 20 FOMC meeting. By then, they should have a much better fix on the economy.”

A committee of bank economists said Wednesday it too believes the central bank will raise the federal funds rate by the end of August, although it was divided over whether a rate hike would occur as early as next week.

“The inflationary risk posed by tight labor markets and mounting wage pressures was the basis for our view that a rate increase will be necessary,” explained Lynn Reaser, an economist at Barnett Banks Inc. in Jacksonville, Fla., and chair of the American Bankers Association’s Economic Advisory Committee.

In its report, the Commerce Department said the increase in orders for durable goods - big-ticket items expected to last more than three years - was the second in three months. They had slipped 1.8 percent in April after a 2.6 percent surge in March.

The transportation sector posted a 12.2 percent gain, most of it due to aircraft sales, and erased a 12.1 percent loss a month earlier. But leaving out transportation, orders were up 0.7 percent, the fifth increase in the last six months.

Orders for industrial machinery and equipment were up 2.5 percent in May, the fourth gain in five months. Tickets for primary metals rose 1.4 percent, the second straight advance.

But orders for electronic and other electrical equipment fell 3 percent, the fourth decline in five months.

The backlog of unfilled orders increased 0.3 percent, the eighth gain in nine months. A growing backlog suggests businesses may require additional production facilities and manpower to meet demand.

Shipments, a measure of current activity, rose 1.9 percent following a 2.1 percent April increase.