US business spending on equipment improving

New orders for key US-made capital goods increased more than expected in April and shipments rebounded, pointing to a moderate pickup in business spending on equipment after slowing down at the end of the first quarter. The report from the Commerce Department on Friday added to data on consumer spending in suggesting momentum in the economy. That bolsters expectations the Federal Reserve will raise interest rates next month. The US central bank increased borrowing costs in March and forecast at least two more rate hikes for this year.
"Business investment spending is solid enough to keep the Federal Reserve on the gradual path of interest rate hikes," said Chris Rupkey, chief economist at MUFG in New York. "The economy is firing on cylinders this quarter with both consumers and business investment adding to the mix on economic growth." Orders for non-defence capital goods excluding aircraft, a closely watched proxy for business spending plans, jumped 1.0 percent last month. The increase in the so-called core capital goods orders reversed March's 0.9 percent drop.
Economists polled by Reuters had forecast core capital goods orders rising 0.7 percent last month. Core capital goods orders increased 6.6 percent on a year-on-year basis. Shipments of core capital goods rose 0.8 percent last month after falling 0.7 percent in March. Core capital goods shipments are used to calculate equipment spending in the government's gross domestic product measurement.
Business spending on equipment slowed in the first quarter after double-digit growth in the second half of 2017. Moderate growth is expected in the second quarter. A survey early this month showed trade policy as the top concern for manufacturers, with some reporting that "business planning is at a standstill" as a result of the tariffs.
Last month, orders for electrical equipment, appliances and components increased 2.6 percent after rising 2.4 percent in March. Orders for computers and electronic products gained 1.1 percent while those for fabricated metals jumped 2.0 percent. There were also increases in orders for primary metals. But orders for machinery fell 0.8 percent after decreasing 3.2 percent in March. Overall orders for durable goods, items ranging from toasters to aircraft that are meant to last three years or more, dropped 1.7 percent in April as demand for transportation equipment tumbled 6.1 percent. That followed a 2.7 percent increase in durable goods orders in March.
Boeing reported on its website that it received only 78 aircraft orders in April compared to 197 in March. Orders for motor vehicles and parts rose 1.8 percent last month after advancing 0.6 percent in March. Unfilled orders of durable goods rose 0.5 percent in April. They have increased in five of the last six months, which bodes well for manufacturing. Unsold durable goods rose 0.3 percent.
A separate report from the University of Michigan on Friday showed its consumer sentiment index slipped to a reading of 98.0 in May from 98.8 in April. While consumers were upbeat about the labour market, they expected smaller income gains than a month or year ago. They also expected inflation and interest rates to rise in the year ahead.