Rising spending on business equipment in the US is allaying recession fears

  • Orders for basic capital goods rose 0.4% in July
  • Supply of basic capital goods up 0.7%
  • Orders for durable goods are unchanged
  • Pending home sales fall 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 modest recovery in business spending this quarter.

The Commerce Department’s report on Wednesday also showed solid gains in supplies of those goods. While some of the increase was due to businesses spending more due to higher prices, the data is another sign that the economy is continuing to grow at a slow pace and is not in recession.

“The lack of a sustained decline in orders suggests that businesses are still investing despite tighter financial market conditions, falling sentiment and recession worries,” 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 percent last month. The June data was revised up to show that these so-called core orders for capital goods rose 0.9% instead of 0.7% as previously reported. Economists polled by Reuters had forecast orders for basic capital goods to rise 0.3 percent.

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

Manufacturing, which accounts for 11.9% of the economy, remains supported by still-low inventories of durable industrial goods such as motor vehicles.

There was an increase in orders for machinery, metal products, and computers and electronic products in July. But orders for electrical equipment, appliances and components fell, as did those for primary metals.

Wall Street stocks were trading higher. The dollar was almost unchanged against a basket of currencies. US government bond prices fell.

INVERSE PICTURE

Supplies of basic capital goods rose 0.7% after rising 0.8% in June. Supplies of fixed capital goods are used to calculate equipment costs in the measurement of gross domestic product.

Higher prices make it harder to get a clean read on equipment cost figures that aren’t adjusted for inflation. There is also uncertainty about which price index the government will use to adjust the data for inflation.

The producer price index for private capital equipment rose 0.5% in July, which would mean that inflation-adjusted orders for basic capital goods were negative last month. But shipments outpaced inflation, putting equipment spending on moderate growth at the start of the third quarter.

“Lower commodity prices suggest the potential for a lower equipment investment price index in the third quarter and therefore greater nominal strength to deliver on measured real growth,” said Andrew Hollenhorst, chief U.S. economist at Citigroup in New York.

Business spending on equipment fell 2.7% year over year in the second quarter, the most in two years. That, along with a slower pace of stockpiling compared to the previous two quarters, helped drag down GDP. The economy shrank by 1.3% in the first half of the year.

Orders for durable goods, items ranging from toasters to airplanes that are designed to last three years or more, were flat in July after rising 2.2 percent in June.

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

Orders for motor vehicles and parts rose 0.2% last month. Motor vehicle production remains constrained by a global shortage of semiconductor chips. Deliveries of durable goods rose 0.4% after a 0.3% increase in June. Backlogs for durable goods rose 0.7%, while inventories rose 0.2%.

“Measuring inventories is particularly difficult in inflationary times, but the inventory-to-sales ratio has reportedly not increased over the past year and supports the view that inventories remain tight,” said Conrad De Quadros, senior economic adviser at Brean Capital in New York.

While production continues, the steepest increase in interest rates since the 1980s is having a significant impact on the housing market. In a separate report Wednesday, the National Association of Realtors said its index of pending home sales, based on signed contracts, fell 1.0 percent to 89.8 last month, the lowest level since April 2020 Contracts have declined in eight of the past nine months. Read more

But with housing prices still high and affordable homes remaining scarce, a housing market crash is unlikely.

“We are not at risk of a housing crash, the conditions are nothing like what the market experienced during the last housing crisis,” said Nicole Basho, senior economist at Zillow in Seattle. “We should not confuse the inability to buy a home with the lack of desire to buy.

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Reporting by Lucia Muticani; Editing by Nick Zieminski and Paul Simao

Our standards: The Thomson Reuters Trust Principles.

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