U.S. Core Capital Goods Orders Are Weak

New orders for U.S. manufactured capital goods rose less than expected in June amid weak demand for machinery and a range of other goods, suggesting that business spending will remain subdued for a while.

Business investment remains soft despite data ranging from retail sales to housing suggesting that the economy has regained speed after growth almost stalled early in the year.

The Commerce Department said on Wednesday non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, increased 0.2 percent last month after decreasing 0.5 percent in May.

Weak business spending could be one of the factors that could encourage Federal Reserve officials to keep interest rates unchanged at the end a two-day meeting later on Wednesday.

Economists polled by Reuters had forecast these so-called core capital goods orders rising 0.3 percent last month.

The dollar fell against the euro after the report, while prices for U.S. government bonds rose.

Overall orders for durable goods, items ranging from toasters to aircraft that are meant to last three years or more, tumbled 4.0 percent last month, the biggest drop since August 2014, after declining 2.8 percent in May.

Business spending has weakened since late 2015, in part as lower oil prices squeezed profits in the energy sector, forcing companies to slash capital spending budgets. Uncertainty over global demand and the upcoming U.S. presidential election are also making companies cautious about spending, economists say.

Prospects for a pick-up in business spending are dim against the backdrop of lackluster corporate profits.

Shipments of core capital goods, which are used to calculate equipment spending in the government’s gross domestic product measurement, fell 0.4 percent last month after sliding 0.5 percent in May. That suggests business spending probably fell again in the second quarter.

Should spending on equipment drop in the second quarter, that would be the first time since the 2007-09 recession that outlays would have contracted for three straight quarters.

According to a Reuters survey of economists, the government will likely report on Friday that GDP increased at a 2.6 percent annual rate in the second quarter after rising at a 1.1 percent pace in the January-March period.

In June, orders for electrical equipment, appliances and components increased 0.8 percent. But orders for machinery fell 0.1 percent and primary metals dropped 1.3 percent. Computers and electronic products orders declined 2.2 percent.

Orders for transportation equipment slumped 10.5 percent as bookings for aircraft plunged 58.8 percent. Orders for automobiles rose 2.6 percent.

Pointing to sustained weakness in business spending, unfilled core capital goods orders fell 0.2 percent in June after slipping 0.4 percent in May. Inventories of those goods rose 0.3 percent.

Reuters

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell