Core capital goods orders fall 0.4% in March Core capital goods shipments fall 0.4% Goods trade deficit narrows 8.1%
WASHINGTON, April 26 (Reuters) – New orders for key US-manufactured capital goods fell more than expected in March and shipments fell, suggesting that equipment business spending in the first quarter likely continued to be a drag on economic growth.
But the economy appears to have remained on a solid growth path over the past quarter, with other Commerce Department data on Wednesday showing the goods trade deficit narrowed sharply on a recovery in exports. While equipment spending weakened, demand remained strong for goods such as computers and electronic products, as well as electrical equipment, appliances and components.
“The economy is not out of control yet,” said Christopher Rupkey, chief economist at FWDBONDS in New York.
Orders for non-defense capital goods excluding aircraft, a closely monitored measure of corporate spending plans, fell 0.4% last month. Data for February was revised down to show a 0.7% drop in these so-called core capital goods orders instead of the 0.1% drop previously reported. Economists polled by Reuters had forecast orders for core capital goods to fall 0.1%.
Orders for electrical equipment, appliances and components increased 0.8%, while bookings for computers and electronic products increased 1.9%. Orders for machinery, primary metals and fabricated metal products barely increased.
But unfulfilled orders for core capital goods continued to fall steadily, indicating there was less in the pipeline to boost activity. Stocks of these goods increased by 0.2%.
Business investment is threatened by a tightening of credit in the wake of the recent financial market turmoil, which could make financing less accessible to small businesses and households. That spills over to the manufacturing industry.
The industry, which accounts for 11.3% of the US economy, is already reeling from the Federal Reserve’s fastest rate hike since the 1980s to curb inflation.
Expenditure is also shifting from goods to services, while weak global demand is hurting exports. The inventory cycle is also changing, with companies restocking slower to meet refrigeration demand.
Shipments of core capital goods fell 0.4% in March after falling by a similar margin in February. Shipments of core capital goods are used to calculate equipment expenditures in the measure of gross domestic product. Shipments of non-defense capital goods, which are also factored into GDP calculations, rebounded by 3.6% after falling 1.1% in February.
“Equipment spending was probably a little weaker in the first quarter,” said Shannon Seery, an economist at Wells Fargo in New York. “Conditions for new capital investment continue to deteriorate. We expect bank lending conditions to tighten further.”
Stocks on Wall Street were mixed. The dollar fell against a basket of currencies. US Treasury bond prices rose.
Core capital goods
GOODS TRADE DEFICIT REDUCES
Most economists expect a small drop in equipment spending when the government releases its preliminary GDP estimate for the first quarter on Thursday. Business investment in equipment in the fourth quarter fell the most in 2-1/2 years.
According to a Reuters survey of economists, GDP is likely to have grown at an annualized rate of 2.0% in the January-March period. The economy grew by 2.6% in the fourth quarter.
While orders for items ranging from toasters to airplanes intended to last three years or more rose 3.2% last month, they were driven by the volatile civil aircraft category, which rose 78.4% after falling 8.4% in February.
These so-called durable goods orders fell by 1.2% in February. Boeing (BA.N) reported on its website that it had received 60 aircraft orders, a sharp increase from just five in February.
Durable goods
Expectations for another quarter of strong GDP growth were bolstered by a second report from the Commerce Department on Wednesday, which showed the goods trade deficit fell 8.1% to $84.6 billion last month.
Exports of goods rose $4.9 billion to $172.7 billion, boosted by industrial inventories, including petroleum, as well as motor vehicles and consumer goods. But food exports fell.
Imports of goods fell by $2.5 billion to $257.3 billion, due to declines in industrial inventories, capital goods and other commodities. Imports of consumer goods increased. While the decline in imports supports higher GDP, the decline in capital goods underscored declining corporate spending.
Trade has contributed to GDP growth for three consecutive quarters. Economists viewed the improvement in trade as temporary and believed that a moderation in the pace of inventory building from the fourth quarter would not have a major impact on last quarter’s GDP growth.
Trade balance
The Commerce Department also reported that wholesale inventories rose 0.1% in March, matching February gains. Retail inventories rose 0.7% after rising 0.3% in the previous month.
Excluding motor vehicles, retail inventories recovered 0.4% after falling 0.1% in February. This component is included in the calculation of GDP. Inventory investment was the biggest driver of GDP growth in the fourth quarter.
“We do not believe this is a change in the trade cooling trajectory, with imports facing weaker consumer demand and tighter credit conditions for businesses, while export demand will slow due to the continued strong dollar and declining economic activity in abroad,” he said. Matthew Martin, an American economist at Oxford Economics.
Reporting by Lucia Mutikani; edited by Chizu Nomiyama
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