08/26/2019

New orders for key U.S.-made capital goods rose modestly in July while shipments fell by the most in nearly three years, pointing to continued weakness in business investment and a slowdown in economic growth early in the third quarter.

Coming against the backdrop of an escalation in U.S.-China trade tensions, the report from the Commerce Department on Monday could provide more ammunition for the Federal Reserve to cut interest rates again next month.

Fed Chair Jerome Powell told a conference of central bankers last week that trade policy uncertainty seems to be playing “a role in the global slowdown and in weak manufacturing and capital spending in the United States.” Though Powell described the economy as being in a “favorable place,” he reiterated that the U.S. central bank would “act as appropriate” to keep the longest economic expansion in history on track.

The Fed lowered its short-term interest rate by 25 basis points last month for the first time since 2008, citing trade tensions and slowing global growth. Financial markets have fully priced in another quarter-percentage-point cut at the Fed’s Sept. 17-18 policy meeting.

Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, increased 0.4% last month, the government said, driven by strong demand for electrical equipment, appliances and components.

Data for June was revised down to show these so-called core capital goods orders advancing 0.9% instead of surging 1.5% as previously reported.

Economists polled by Reuters had forecast core capital goods orders would fall 0.1% in July. Core capital goods orders increased 1.5% on a year-on-year basis.

Shipments of core capital goods fell 0.7% last month, the biggest drop since October 2016. Core capital goods shipments are used to calculate equipment spending in the government’s gross domestic product measurement. Data for June was revised down to show core capital goods shipments were unchanged instead of rising 0.3% as previously reported.

U.S. stock index futures held gains after the release of the data while yields on U.S. Treasuries were largely unchanged. The dollar .DXY was trading higher against a basket of currencies.

SHIPMENTS FALL

Business investment has been weak, largely blamed on the Trump administration’s trade war with China, which is taking a toll on global economies and U.S. manufacturing.

President Donald Trump on Friday announced a new round of tariffs on Chinese imports, hours after Beijing unveiled retaliatory tariffs on $75 billion worth of U.S. goods.

Business investment contracted in the second quarter for the first time since the first quarter of 2016. Weak business investment is underscored by manufacturing, where output has contracted for two straight quarters. Manufacturing, which accounts for about 12% of the economy, is also being undercut by an inventory bloat and design problems at Boeing.

In July, orders for electrical equipment, appliances and components jumped 1.1%. But orders for machinery fell 0.6%. There was also declines in orders for primary metals and fabricated metal products.

Overall orders for durable goods, items ranging from toasters to aircraft that are meant to last three years or more, increased 2.1% in July, the most since August 2018, after rising 1.8% in the prior month.

Orders for transportation equipment jumped 7.0% after gaining 4.1% in June. Motor vehicles and parts orders rose 0.5% last month. Orders for non-defense aircraft and parts increased 47.8%.

Durable goods shipments dropped 1.1% last month. Unfilled orders for these goods edged up 0.1%, while inventories increased 0.4%, suggesting manufacturing would probably continue to struggle in the coming months.

Reuters (Reporting by Lucia Mutikani; Editing by Paul Simao)