The Economy

U.S. Core Capital Goods Orders Jump 1.8%

The February gain in orders was a positive sign for business spending after declines in the previous two months.
Matthew HellerMarch 26, 2018

After two straight months of declines, new orders for key U.S.-made capital goods bounced back in February, easing fears of a slowdown in business spending.

The Commerce Department reported that orders for non-defense capital goods excluding aircraft — a closely-watched proxy for business spending plans — rose 1.8% last month. It was the biggest gain in five months and followed a 0.4% decrease in January and a 0.6% drop in December.

Economists polled by Reuters had forecast a 0.8% rise in core capital goods orders in February. Core capital goods orders increased 7.4% on a year-on-year basis.

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According to Wells Fargo analysts, the declines over the previous two months had “raised some doubts about the outlook for business spending despite all the euphoria surrounding recent tax changes. The state of business spending, however, looks much stronger following the February durable goods report.”

Reuters said spending on equipment “remains underpinned by robust business confidence, strengthening global economic growth and a weakening dollar, which is boosting demand for U.S. exports. That is helping to support manufacturing, which accounts for about 12 percent of U.S. economic activity.”

“The strength in core capital goods shipments, together with a surge in industrial production in February, could help offset the impact of soft consumer spending on first-quarter growth,” Reuters added.

The February durable goods report prompted economists at Barclays to raise their first-quarter GDP growth estimate by one-tenth of a percentage point to a 1.9 percent annualized rate, while JP Morgan lifted its estimate for equipment spending growth in the first three months of the year to 7% from 5%.

Economists warn, however, that the threat of a trade war could dim the outlook for capital investment.

“Uncertainty hurts capital spending and the greatest uncertainty in the economic environment at present is the wild-card threat that U.S. tariff actions poses to the global trading system,” said John Ryding, chief economist at RDQ Economics.

Overall orders for durable good jumped 3.1% last month as demand for transportation equipment soared 7.1% after tumbling 3.5% in January.