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Kimberly Amadeo

Cuts in Defense Spending Lowers Durable Goods Orders

By February 27, 2013

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Manufacturers' orders for durable goods fell a 5.2% in January, to $217 billion. However, most of the decline was due to a sharp drop in orders for aircraft, down 19.8%. This was a result of cutbacks in defense spending in anticipation of sequestration, and a hesitation in ordering the Boeing 787 Dreamliner until the battery malfunction is fixed. Once transportation orders are removed from the calculations, durable goods orders increased a healthy 1.9%.

Durable goods shipments were also affected by the drop in transportation orders. January shipments fell 1.2%,  after four months of increases. Shipments contribute to the quarterly Gross Domestic Product (GDP) report. If sequestration continues, expect a contraction in GDP growth for the first quarter. That's because government spending is an important driver of U.S. economic growth. (Source: Census Bureau, Advance Report on Durable Goods, February 27, 2013 )

What This Means for You

The U.S. economic outlook is being affected by two opposing forces -- positive business growth driven by exports, and a negative drag driven by austerity measures to reduce the U.S. debt. The durable goods report confirms this - growth is up except for government spending. To avoid further damage, debt reduction should be delayed until the economy is growing a robust 3-4%.

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