Rise in U.S. business spending bolsters economic outlook

WASHINGTON (Reuters) - New orders for key U.S.-made capital goods rose slightly more than expected in July and shipments surged, pointing to an acceleration in business spending early in the third quarter.

File photo: A woman shops for a refrigerator at a store in Schaumburg, Illinois, near Chicago September 23, 2013. REUTERS/Jim Young

The Commerce Department’s upbeat report on Friday also suggested the economy continued to gather momentum after growth slowed at the start of the year. Strength in business investment bolsters the case for the Federal Reserve announce next month a plan to start unwinding its massive bond portfolio.

“Growth continues on a solid footing,” said Andrew Hollenhorst, an economist at Citigroup in New York. “The announcement of a September balance sheet reduction looks close to a done deal. A December rate hike and further hikes in 2018 remain contingent on increasing inflation.”

Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, increased 0.4 percent last month after being unchanged in June. Economists had forecast these so-called core capital goods orders to rise 0.3 percent last month. They were up 3.3 percent from a year ago.

Shipments of core capital goods jumped 1.0 percent after an upwardly revised 0.6 percent increase in June. Core capital goods shipments are used to calculate equipment spending in the government’s gross domestic product measurement.

They were previously reported to have gained 0.1 percent in June. Core capital goods shipments advanced 2.4 percent on a year-on-year basis.

Businesses are boosting spending despite uncertainty over the prospect of tax cuts. President Donald Trump and his fellow Republicans in Congress have said they want to lower both corporate and individual taxes as part of an overhaul of the tax code, but few details have emerged.

With lawmakers soon to be preoccupied with legislation to raise the country’s debt ceiling and keep the government funded beyond September, it is unclear how quickly the tax changes will be put on the legislative agenda.


“The pickup in business investment is welcome as a sign of the economy’s health, but we would need to see much stronger gains to meaningfully move the dial on productivity growth, and we suspect this is unlikely to happen without corporate tax reform,” said John Ryding, chief economist at RDQ Economics in New York.

National Economic Council director Gary Cohn told The Financial Times on Friday that starting next week Trump’s “agenda and calendar is going to revolve around tax reform.”

The data and Cohn's comments helped to lift U.S. stocks. The dollar fell against a basket of currencies .DXY, while prices for U.S. Treasuries were largely higher.

Business spending on equipment added 0.44 percentage point to the economy’s 2.6 percent annualized growth pace in the second quarter, the most in nearly two years. It has been buoyed by the energy sector, where oil and gas drilling has rebounded after declining in the wake of the collapse in crude oil prices.

That is helping to offset some of the drag on manufacturing from declining motor vehicle production. Manufacturing accounts for about 12 percent of the U.S. economy. Last month, orders for machinery fell 1.4 percent, the biggest drop since May 2016, after rising 0.6 percent in June.

Orders for computers and electronic products recorded their biggest gain in a year, as did those for electrical equipment, appliances and components. There were also increases in bookings for fabricated metal products.

But a 19 percent plunge in orders for transportation equipment weighed on overall durable goods orders, which range from toasters to aircraft and are meant to last three years or more. They tumbled 6.8 percent last month, the biggest drop since August 2014, after a 6.4 percent increase in June.

Orders for civilian aircraft plummeted 70.7 percent after soaring 129.3 percent in June. Boeing BA.N has reported on its website that it received only 22 aircraft orders in July, sharply down from 184 in the prior month.

Orders for motor vehicles and parts fell 1.2 percent in July, the biggest decline since May 2016, after decreasing 0.7 percent in June. Auto sales peaked in December 2016 and slowing demand has led to three consecutive monthly declines in motor vehicle production.

Reporting by Lucia Mutikani; Editing by Paul Simao