U.S. Capital Goods Orders Rebound Amid Rate Hike Uncertainty

New U.S.-manufactured capital goods orders saw an unexpected rebound in April, suggesting a slight improvement in business spending on equipment. Despite higher borrowing costs dampening investment, shipments also increased. The Federal Reserve is anticipated to cut interest rates in September, potentially boosting business investment further.

New orders for key U.S.-manufactured capital goods rebounded more than expected in April and shipments of those goods also increased, suggesting a modest improvement in business spending on equipment early in the second quarter.

Nonetheless, business investment on equipment continues to be hamstrung by higher borrowing costs. That, together with a strong dollar and weak global demand, is keeping manufacturing, which accounts for 10.4% of the economy, on the ropes. The Federal Reserve is expected to start cutting interest rates in September. "Despite elevated borrowing costs and stricter loan standards, U.S. business investment could pick up in the second quarter," said Sal Guatieri, a senior economist at BMO Capital Markets. "However, the manufacturing sector, as a whole, is expected to remain in low gear until interest rates ease, the greenback weakens, and the global economy strengthens."

Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, rose 0.3% last month after slipping 0.1% in March, the Commerce Department's Census Bureau said on Friday. Economists polled by Reuters had forecast these so-called capital goods orders would edge up 0.1%. Core capital goods orders jumped 1.2% on a year-on-year basis in April. Shipments increased 0.4% after dropping 0.3% in March.

Non-defense capital goods orders fell 1.5% in April after advancing 1.3% in the prior month. Shipments of these goods surged 2.4% after dropping 1.5% in March. These shipments go into the calculation of the business spending on equipment component in the gross domestic product report. Orders and shipments were partially flattered by higher prices, which could lessen the boost to GDP.

RATE-PATH UNCERTAINTY Business spending on equipment rebounded marginally in the first quarter after two straight quarterly declines, making a small contribution to the economy's 1.6% annualized growth pace.

Investment has been hampered by Fed policy tightening that has lifted the U.S. central bank's benchmark interest rate by 525 basis points since March 2022, eroding demand for goods and raising financing costs for businesses. The Fed has kept its policy rate in the 5.25%-5.50% range since July. "While growth remains positive for now, uncertainty about the rate path may weigh on orders going forward," said Rubeela Farooqi, chief U.S. economist at High Frequency Economics. "However, a push from fiscal spending could be positive for orders and investment over time."

Orders for durable goods, items ranging from toasters to aircraft meant to last three years or more, rose 0.7% in April after gaining 0.8% in March. Durable goods orders were lifted by a 1.2% rise in transportation equipment, which followed a 2.5% acceleration in March. Orders for motor vehicles and parts increased 1.5% after jumping 2.8% in March. Commercial aircraft orders decreased 8.0% after rising 7.7% in March. Boeing reported on its website that it had received seven aircraft orders in April, sharply down from 113 in the prior month.

Orders for computers and electronic products rose 0.6% last month, while those for electrical equipment, appliances and components shot up 0.9%. There were also increases in orders for machinery and fabricated and primary metals. Shipments of durable goods increased 1.2% after edging up 0.1% in March. Durable goods inventories nudged up 0.1%. Unfilled orders climbed 0.2%.

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