U.S. core capital goods orders, shipments surge in February

By Lucia Mutikani

WASHINGTON (Reuters) - New orders for key U.S.-made capital goods rebounded more than expected in February after two straight monthly declines and shipments surged, which could temper expectations of a sharp slowdown in business spending on equipment in the first quarter.

The Commerce Department's report on Friday prompted some economists to raise their economic growth estimates for the first three months of the year. They were slashed last week after data showed retail sales fell in February for the third month in a row.

The Federal Reserve painted an upbeat picture of the economy on Wednesday when it raised interest rates and forecast at least two more increases for 2018.

"There is speculation that the economy is running out of room to grow. But the jump in core durable goods purchases, machinery that is used in factory production, keeps the recession winds at bay," said Chris Rupkey, chief economist at MUFG in New York.

Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, jumped 1.8 percent last month. That was the biggest gain in five months and followed a downwardly revised 0.4 percent decrease in January.

Economists polled by Reuters had forecast those orders rising only 0.8 percent in February after a previously reported 0.3 percent decline in January. Core capital goods orders increased 7.4 percent on a year-on-year basis.

Shipments of core capital goods increased 1.4 percent last month, the biggest advance since December 2016, after an upwardly revised 0.1 percent gain in January. Core capital goods shipments are used to calculate equipment spending in the government's gross domestic product measurement.

They were previously reported to have slipped 0.1 percent in January. Business spending on equipment powered ahead in 2017 as companies anticipated a hefty reduction in the corporate income tax rate. The Trump administration slashed that rate to 21 percent from 35 percent effective in January.

U.S. financial markets were little moved by the data as investors worried that President Donald Trump's announcement on Thursday of tariffs on up to $60 billion of Chinese goods could start a global trade war.

Prices of longer-dated U.S. Treasuries were trading lower while U.S. stock indexes were mixed. The dollar fell against a basket of currencies.

STRONG BUSINESS SPENDING

The surge in core capital goods orders in February suggests further gains. There had been concerns spending could slow sharply after double-digit growth in the past quarters.

Economists, however, expressed fears the threat of a trade war could cause businesses to curtail spending on equipment.

"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 in New York.

For now, investment in 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.

Economists at Barclays raised their first-quarter GDP growth estimate by one-tenth of a percentage point to a 1.9 percent annualized rate. JP Morgan lifted its estimate for equipment spending growth in the first three months of the year to a 7 percent rate from 5 percent.

A second report from the Commerce Department on Friday showed new home sales falling for a third straight month in February, suggesting a moderation in growth in spending on residential construction in the first quarter.

The government reported last month that the economy grew at a 2.5 percent pace in the fourth quarter. However, revisions to December data on construction spending, factory orders and wholesale inventories have suggested the fourth-quarter growth estimate could be raised to a 3.1 percent pace. The government will publish its third GDP estimate on Wednesday.

Last month, orders for machinery soared 1.6 percent. There were also hefty increases in orders of primary metals and electrical equipment, appliances and components.

Orders for computers and electronic products fell 0.2 percent, with bookings for communications equipment recording their biggest drop since December 2015.

Overall orders for durable goods, items ranging from toasters to aircraft that are meant to last three years or more, vaulted 3.1 percent last month as demand for transportation equipment soared 7.1 percent.

That followed a 3.5 percent tumble in January. Orders for motor vehicles and parts increased 1.6 percent last month after edging up 0.1 percent in January.

(Reporting by Lucia Mutikani; Editing by Paul Simao)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)