Businesses set to step up capital goods spending

WASHINGTON Thu Jul 25, 2013 12:17pm EDT

A man wearing a U.S. flag necktie stands in line to talk to prospective employers at the National Capital Region Job Fair sponsored by Virginia Tech University at their branch campus in Falls Church, Virginia, March 10, 2009. REUTERS/Jonathan Ernst

A man wearing a U.S. flag necktie stands in line to talk to prospective employers at the National Capital Region Job Fair sponsored by Virginia Tech University at their branch campus in Falls Church, Virginia, March 10, 2009.

Credit: Reuters/Jonathan Ernst

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WASHINGTON (Reuters) - A gauge of planned business spending on capital goods rose in June, buoying hopes of an acceleration in economic growth in the second half of 2013.

The data on Thursday was the latest to suggest factory activity was regaining some momentum after hitting a soft patch earlier this year and it fit in with views that the drag on the economy from tighter fiscal policy was ebbing.

A separate report showed new claims for jobless benefits edged higher last week, but remained within a range that suggests the labor market's recovery is on track.

Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, increased 0.7 percent last month, the Commerce Department said. May's gain was also revised higher, to 2.2 percent from 1.5 percent.

"That seems to portend an increase in capex as we roll into the third quarter and suggests that third-quarter growth is going to pick-up," said Jacob Oubina, senior U.S. economist at RBC Capital Markets in New York.

However, shipments of these so-called core capital goods - used to calculate equipment and software spending in the gross domestic product report, fell 0.9 percent last month. The drop, which followed a 1.9 percent increase in May, was a reminder of just how much economic growth in the second quarter slowed.

Forecasting firm Macroeconomic Advisers cut its projection for second quarter GDP growth by two-tenths of a percentage point to a 0.5 percent annual rate on the weak shipments number. JPMorgan also lowered its forecast to 0.5 percent.

Higher taxes and deep government spending cuts have dampened economic activity in the first half of the year, but the drag appears to be fading.

In addition to the increase in planned business investment spending, the report showed overall orders for long-lasting manufactured goods jumped 4.2 percent as demand for transportation goods and machinery increased.

It was a third straight month of gains and pushed orders for these goods, which range from toasters to aircraft, to a record high, surpassing the previous peak reached in December 2007, the month the economy slipped into recession.

LABOR MARKET IMPROVING

While a separate report from the Labor Department showed initial claims for state unemployment benefits increased 7,000 to 343,000 last week, economists said volatility linked to annual auto plant shutdowns was likely distorting the picture.

Automakers traditionally close plants in July for retooling. However, they have either shortened the shutdown period or completely forgone the closures, throwing off the model that the government uses to adjust the data for seasonal variations.

A four-week average of new claims, which irons out the week-to-week volatility, held at levels that economists say are consistent with improving labor market conditions.

"It appears from the four-week average of claims that there is no evidence of a pickup in job losses in July," said John Ryding, chief economist at RDQ Economics in New York. He said that bodes well for next week's report on employment growth in June. Economists expect that report to show U.S. employers added 184,000 workers to their payrolls.

Although a surge in bookings for civilian and defense aircraft and solid demand for motor vehicles buoyed orders for durable goods in June, there were also signs of strength in other categories.

In addition, unfilled orders recorded their largest gain since December 2007. Even more encouraging, order books for core capital goods rose a solid 1.7 percent.

"With unfilled orders on the up and core orders swinging higher the odds of a shift higher in investment spending, so critical to the economic outlook, is beginning to gel," said Eric Green, chief economist at TD Securities in New York.

(Reporting by Lucia Mutikani; Additional reporting by Doug Palmer; Editing by Paul Simao)

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