A rise in US business equipment spending eases fears of a recession

  • Orders for core capital goods rose 0.4% in July
  • Shipments of major capital goods rose 0.7%
  • Durable goods orders unchanged
  • Pending home sales fell 1.0% in July

WASHINGTON, Aug 24 (Reuters) – New orders for U.S.-made capital goods rose in July, but the pace slowed from the previous month, suggesting a moderate rebound in business spending this quarter.

A Commerce Department report on Wednesday also showed solid gains in shipments of these goods. While part of the increase was because businesses are spending more because of higher prices, the data was another sign that the economy was growing at a slower pace and was not in recession.

“The absence of a sustained decline in orders suggests that businesses are investing despite tighter financial market conditions, declining sentiment and concerns about a recession,” said Ryan Sweet, senior economist at Moody’s Analytics in West Chester, Pennsylvania.

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Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, rose 0.4% last month. June data was revised higher to show orders for these so-called key capital goods rose 0.9% instead of 0.7% as previously reported. Economists polled by Reuters had forecast core capital goods orders to rise 0.3%.

The report added data on retail sales, industrial production and the labor market, emphasizing the economy’s resilience. Orders are slowing as the Federal Reserve’s aggressive monetary policy campaign to combat inflation dampens demand. Fed Chairman Jerome Powell’s address on Friday at the annual Jackson Hole Global Central Banking Conference in Wyoming may shed more light on whether the US central bank can engineer an economic slowdown without triggering a recession.

Manufacturing, which accounts for 11.9% of the economy, is supported by still-low inventory of durable manufactured goods such as motor vehicles.

Orders for machinery, metal products as well as computer and electronic products increased in July. But orders for electrical appliances, equipment and components fell, as did those for primary metals.

Stocks were trading higher on Wall Street. The dollar was largely unchanged against a basket of currencies. US Treasury prices fell.

A distorted picture

Shipments of core capital goods rose 0.7 percent after rising 0.8 percent in June. Shipments of capital goods are used to calculate equipment spending in the gross domestic product measure.

High prices are making it difficult to get a clean read of equipment spending data, which is not adjusted for inflation. There is also uncertainty about which price index the government will use to adjust the inflation data.

The producer price index for private capital equipment rose 0.5% in July, indicating that orders for inflation-adjusted core capital goods were negative last month. But shipments are running ahead of inflation, keeping equipment spending on a moderate growth path early in the third quarter.

“Commodity prices suggest the possibility of a lower equipment investment price index in the third quarter and consequently more potential for nominal strength to work its way up to measured real growth,” said Andrew Hollenhorst, chief U.S. economist at Citigroup in New York.

Business spending on appliances fell at a 2.7% annual rate in the second quarter, the most in two years. That, along with a slower pace of inventory accumulation than in the previous two quarters, helped dampen GDP. It has contracted by 1.3 percent in the first half of the financial year.

Orders for durable goods, items ranging from toasters to aircraft that last three years or more, were unchanged in July after rising 2.2% in June.

They were offset by a 0.7% decline in orders for transport equipment. Orders for civil aircraft rose 14.5%. However, they were offset by a 49.8% dip in orders for defense aircraft. Boeing ( BA.N ) said on its website that it had received 130 aircraft orders, compared with 50 in June.

Orders for motor vehicles and parts rose 0.2% last month. Automotive production remains limited by a global semiconductor chip shortage. Shipments of durable goods rose 0.4% after rising 0.3% in June. Durable goods orders filled rose 0.7%, while inventories rose 0.2%.

“Inventories are especially difficult to measure in times of inflation, but the inventory to sales ratio is not up from last year and supports the view that inventories remain tight,” said Conrad DeQuadros, senior economic adviser at Brain Capital in New York.

While construction stalled, the steep run of interest rate hikes since the 1980s has had a significant impact on the housing market. In a separate report Wednesday, the National Association of Realtors reported that its pending home sales index, based on signed contracts, fell 1.0% last month to 89.8, the lowest level since April 2020. Contracts have declined in eight of the last nine months. . Read more

However, with affordable housing scarce and house prices still rising, the housing market is unlikely to collapse.

“We are not at risk of a housing crash, not the kind of situation the market experienced during the last housing crisis,” said Nicole Bachaud, senior economist at Zillow in Seattle. “We should not confuse the inability to afford a home with a lack of desire to buy.”

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Reporting by Lucia Mutikani; Edited by Nick Ziminski and Paul Simao

Our Standards: Thomson Reuters Trust Principles.

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