WASHINGTON: New orders for key US-made capital goods increased more than expected in August and shipments raced to their highest level in nearly six years, suggesting a rebound in business spending on equipment was underway after a prolonged slump. The show of confidence by businesses in the report from the Commerce Department on Friday also bolstered expectations for a sharp turnaround in economic activity in the third quarter, thanks to government money, after it was hammered by the COVID-19 pandemic in the first half of the year.
But fiscal aid is running out and new coronavirus cases are rising in the country, clouding the fourth-quarter picture. Federal Reserve Chair Jerome Powell this week stressed the need for more fiscal stimulus, telling lawmakers on Thursday that it could make the difference between continued recovery and a much slower economic slog. Another rescue package appears unlikely before the Nov. 3 presidential election. “The recovery in capex is not screeching to a halt,” said Sarah House, a senior economist at Wells Fargo Securities in Charlotte, North Carolina. “Equipment spending will be a key contributor to the third-quarter’s bounce back in GDP.”
Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, rose 1.8 percent last month to the highest level since July 2018. Data for July was revised up to show these so-called core capital goods orders increasing 2.5 percent instead of 1.9 percent as previously reported. Core capital goods orders are now above the their pre-pandemic level.
Economists polled by Reuters had forecast orders for these goods gaining 0.5 percent in August. Core capital goods orders last month were boosted by increased demand for machinery, primary metals and computers and electronic products. But orders for fabricated metals products and electrical equipment, appliances and components fell. Stocks on Wall Street were trading higher. The dollar gained versus a basket of currencies. US Treasury prices rose.
Strong third quarter expected
Shipments of core capital goods increased 1.5 percent last month to the highest level since September 2014. Core capital goods shipments are used to calculate equipment spending in the government’s gross domestic product measurement. They advanced 2.8 percent in July. The two straight months of strong growth in shipments are likely to lift overall business investment from a deep hole in the third quarter.
Business investment tumbled at a record 26 percent annualized rate in the second quarter, with spending on equipment collapsing at an all-time pace of 35.9 percent. Investment in equipment has contracted for five straight quarters. Economic activity rebounded sharply over the summer as businesses reopened after mandatory closures in mid-March to slow the spread of the coronavirus.
Gross domestic product is expected to rebound at as much as a record 35 percent annualized rate in the third quarter after tumbling at a 31.7 percent rate in the April-June period, the worst performance since the government started keeping records in 1947. But the economy is far from being out of the woods. Government loan programs to help businesses and income supplements for the tens of millions of unemployed have either lapsed or are close to expiring.
New claims for unemployment benefits unexpectedly rose last week, businesses activity appeared to ebb in September and retail sales slowed in August. Goldman Sachs on Wednesday cut its fourth-quarter GDP growth estimate to a 3 percent rate from a 6 percent pace, citing “lack of further fiscal support.” “Decelerating from the reopening-induced, artificially high pace is something everyone is expecting,” said Joel Naroff, chief economist at Naroff Economics in Holland, Pennsylvania. “The question is how fast do we slow? The September numbers will start providing some answers.”
For now the industrial side of the economy pressing ahead. Orders for durable goods, items ranging from toasters to aircraft that are meant to last three years or more, rose 0.4 percent in August after jumping 11.7 percent in July. Durable goods orders were supported by a 0.5 percent rise in orders for transportation equipment, though demand for motor vehicles and defense aircraft eased.
Orders for motor vehicles and parts dropped 4.0 percent after accelerating 21.7 percent in July. There were no orders for civilian aircraft reported for the second straight month in August. Boeing has struggled with cancellations as airlines grapple with sharply reduced demand for air travel because of the pandemic. The grounding of Boeing’s best-selling 737 MAX jets since March 2019 after two crashes in Indonesia and Ethiopia has also weighed on the company. There was a continued drawdown of durable goods inventories last month, which bodes well for future production, though unfilled orders declined further. – Reuters