U.S. business spending tepid

October 27, 2016 09:46 AM

New orders for U.S. manufactured capital goods unexpectedly fell in September amid weak demand for computers and electronic products, which could temper expectations for an acceleration in business spending in the fourth quarter.

Other data on Thursday showed a drop in the number of Americans applying for unemployment benefits last week, pointing to sustained labor market strength and firming economic growth.

The Commerce Department said non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, fell 1.2% after three straight months of strong gains. 

These so-called core capital goods orders increased by an upwardly revised 1.2% in August. Economists had forecast core capital goods orders rising 0.3% last month after a previously reported 0.9% increase in August. 

"This is a bit of a discouraging handoff to the fourth quarter. There is a reluctance to boost capex (capital expenditure) meaningfully," said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto.

Shipments of core capital goods rose 0.3% last month after being unchanged in August. Core capital goods shipments are used to calculate equipment spending in the government's gross domestic product measurement. 

Despite last month's increase in shipments, business spending on equipment likely remained weak in the third quarter. The government will publish its first estimate of third-quarter GDP on Friday. 

Growth estimates for the third quarter are currently as high as a 3.3% annualized rate, reflecting a solid pace of consumer spending and strong exports. The economy grew at a 1.4% pace in the second quarter.


TIGHTENING LABOR MARKET

The improving economic picture was underscored by a separate report on Thursday from the Labor Department showing initial claims for state unemployment benefits decreasing 3,000 to a seasonally adjusted 258,000 for the week ended Oct. 22. That marked 86 straight weeks that claims have been below the 300,000 threshold, which is normally associated with a strong job market. That is the longest stretch since 1970, when the labor market was much smaller.

U.S. stock index futures edged up and longer-dated U.S. Treasuries pared losses after the data. The U.S. dollar was trading largely unchanged against a basket of currencies.

While overall business spending rebounded modestly in the second quarter, investment on equipment has been subdued since late 2015 as a strong dollar and lower oil prices squeezed companies' profits, forcing them to cut budgets.

With the dollar's rally appearing to have peaked and oil and gas drilling activity rising in recent months, there is cautious optimism that the worst of the equipment spending rout is over. Still, any rebound is likely to be modest. Heavy machinery maker Caterpillar this week reported a 49% drop in third-quarter profit from a year ago and lowered its full-year revenue outlook for the second time this year. 

Caterpillar said demand for new heavy machinery had been undercut by an "abundance" of used construction equipment, a "substantial" number of idle locomotives and a "significant" number of idle mining trucks.

A 0.8% drop in demand for transportation equipment pushed down overall orders for durable goods, items ranging from toasters to aircraft that are meant to last three years or more, by 0.1% last month. 

That followed a 0.3% increase in August. There were declines in orders for primary metals and fabricated metal products. Orders for machinery and electrical equipment, appliances and components rose last month.

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