US business spending digging out of deep hole

27 September, 2020 12:00 AM printer

WASHINGTON: New orders for key US-made capital goods increased more than expected in August and shipments raced to their highest level in nearly six years, suggesting a rebound in business spending on equipment was underway after a prolonged slump.

The show of confidence by businesses in the report from the Commerce Department on Friday also bolstered expectations for a sharp turnaround in economic activity in the third quarter, thanks to government money, after it was hammered by the COVID-19 pandemic in the first half of the year, report agencies.

But fiscal aid is running out and new coronavirus cases are rising in the country, clouding the fourth-quarter picture.

Federal Reserve Chair Jerome Powell this week stressed the need for more fiscal stimulus, telling lawmakers on Thursday that it could make the difference between continued recovery and a much slower economic slog. Another rescue package appears unlikely before the Nov. 3 presidential election.

“The recovery in capex is not screeching to a halt,” said Sarah House, a senior economist at Wells Fargo Securities in Charlotte, North Carolina. “Equipment spending will be a key contributor to the third-quarter’s bounce back in GDP.”

Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, rose 1.8per cent last month to the highest level since July 2018. Data for July was revised up to show these so-called core capital goods orders increasing 2.5per cent instead of 1.9per cent as previously reported. Core capital goods orders are now above the their pre-pandemic level.

Economists polled by Reuters had forecast orders for these goods gaining 0.5per cent in August.

Core capital goods orders last month were boosted by increased demand for machinery, primary metals and computers and electronic products. But orders for fabricated metals products and electrical equipment, appliances and components fell.

Stocks on Wall Street were trading higher. The dollar gained versus a basket of currencies. U.S. Treasury prices rose.

Shipments of core capital goods increased 1.5per cent last month to the highest level since September 2014. Core capital goods shipments are used to calculate equipment spending in the government’s gross domestic product measurement.

They advanced 2.8per cent in July. The two straight months of strong growth in shipments are likely to lift overall business investment from a deep hole in the third quarter.

Business investment tumbled at a record 26per cent annualized rate in the second quarter, with spending on equipment collapsing at an all-time pace of 35.9per cent. Investment in equipment has contracted for five straight quarters.

Economic activity rebounded sharply over the summer as businesses reopened after mandatory closures in mid-March to slow the spread of the coronavirus.