US capital goods orders record largest drop in eight months

WASHINGTON: New orders for key US-made capital goods dropped by the most in eight months in December and shipments were weak, suggesting business investment contracted further in the fourth quarter and was a drag on economic growth.
Business spending remains one of the weak spots in the economy. Housing, the other laggard, is regaining momentum in response to the Federal Reserve’s three interest rate cuts last year. Officials from the US central bank were scheduled to start a two-day policy meeting on Tuesday.
They are expected to reiterate the Fed’s desire to keep rates unchanged at least through this year. Weak business investment and the resulting slump in manufacturing have been on the radar of Fed officials who have blamed trade tensions, especially the White House’s 18-month trade war with China, and an uncertain global economic growth outlook for the malaise.
Though tensions have eased with the signing this month of a “Phase 1” trade deal between Washington and Beijing, Boeing continues to loom over manufacturing. Boeing this month suspended production of its troubled 737 MAX jetliner, which was grounded last March following two fatal crashes.
The Commerce Department said on Tuesday orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, fell 0.9 per cent last month as demand for machinery, primary metals and electrical equipment, appliances and components declined.
That was the largest decrease since April. Data for November was revised lower to show these so-called core capital goods orders edging up 0.1 per cent instead of gaining 0.2 per cent as previously reported. Economists polled by Reuters had forecast core capital goods would be unchanged in December.
Core capital goods orders rose 0.8 per cent in 2019. Shipments of core capital goods decreased 0.4 per cent last month. Core capital goods shipments are used to calculate equipment spending in the government’s gross domestic product measurement. They declined by an unrevised 0.3 per cent in November.
US stock index futures were trading higher and the dollar rose against a basket of currencies. Prices of US Treasuries fell.
Business investment has contracted for two straight quarters and likely remained in the red in the fourth quarter, subtracting from GDP growth. The Atlanta Fed is forecasting GDP to rise at a 1.8 per cent annualised rate in the fourth quarter. The economy grew at a 2.1 per cent rate in the July-September period.
The government will publish its snapshot of fourth-quarter GDP on Thursday. Business investment had been weighed down by steep declines in both spending on equipment and nonresidential structures such as gas and oil well drilling.
That has landed manufacturing, which accounts for 11 per cent of the economy, in recession. Capital expenditure has been undercut by the US-China trade war, which has hurt business confidence.
Boeing’s biggest assembly-line halt in more than 20 years is expected to wreak havoc with the supply chain. The plane maker’s largest supplier, Spirit AeroSystems Holdings, announced early this month that it planned to lay off more than 20 per cent of the workforce at its Wichita, Kansas base.
Economists estimate the production suspension could slice at least half a percentage point from first-quarter GDP growth. The hit to GDP growth would come from a smaller inventory build. Though airlines have continued to submit orders there have been no deliveries, leading to a rise in inventories at factories.
In December, overall orders for durable goods, items ranging from toasters to aircraft that are meant to last three years or more, rebounded 2.4 per cent after tumbling 3.1 per cent in the prior month.
They were boosted by a 7.6 per cent surge in orders for transportation equipment, the largest increase since August 2018, which followed an 8.3 per cent drop in November. — Reuters