WRAPUP 2-AI investment boom powers US business spending on equipment in September

New orders for ​key US-manufactured capital goods increased in September and shipments of these products surged, suggesting business spending on equipment ‌maintained ​a robust growth pace in the third quarter, though doubts are mounting over the huge cost of building out AI infrastructure. The upbeat report from the Commerce Department on Tuesday reinforced economists' expectations that the economy grew strongly in the third quarter. The government is scheduled to publish its advance estimate of gross domestic product for the July-September period on Thursday.

Though other data showed consumer confidence perking up in October, frustration over higher prices persisted, mostly stemming from ‌tariffs on imports and the US-Israeli war with Iran. There were growing concerns that data centers to power the AI technology could raise electricity prices. The rising cost of living is weighing heavily on the minds of Americans heading into next Tuesday's midterm elections, which will determine control of the US Congress, with President Donald Trump's approval rating stuck near record lows.

"There is an investment boom and not everyone in America is participating in it, but the equipment expenditures will continue and economic growth will likely have a 3% handle on it for the foreseeable future," said Christopher Rupkey, chief economist at FWDBONDS. Non-defense capital goods orders excluding aircraft, ‌a closely watched proxy for business spending, rose 0.5% last month after an unrevised 1.6% jump in August, the Commerce Department's Census Bureau said.

Economists polled by Reuters had forecast these so-called core capital goods orders would advance by 0.7%. Core capital goods orders increased 10.9% year-on-year in September. Shipments of ‌core capital goods, which go into the calculation of the business spending on equipment component in the gross domestic product report, vaulted 1.2% last month after gaining 0.6% in August. Shipments of core capital goods increased 8.8% year-on-year in September.

Overall non-defense capital goods orders accelerated 6.2%, and shipments increased 1.7%. Economists estimated that business spending on equipment grew at a roughly 20% annualized rate last quarter. That would mark a third straight quarter of double-digit growth.

A Reuters survey of economists forecast GDP increasing at a 3.2% rate in the July-September quarter. This estimate could be impacted by advance September goods trade, wholesale and retail inventory data on Wednesday. The economy grew at a 2.2% pace in the second quarter. Stocks on Wall Street were mostly higher. The dollar climbed against ⁠a basket of ​currencies. US Treasury yields rose.

STRONG THIRD-QUARTER GDP GROWTH ANTICIPATED The AI-driven spending boom is ⁠helping to underpin manufacturing and the overall economy, blunting the hit from the dragging-on Middle East conflict, which is snarling supply chains and driving up commodity prices, including for energy products. But investors are increasingly focusing on the rising costs of long-term projects in which the payoff is uncertain. Tech firms have borrowed huge sums over the past year for AI spending, a potential ⁠downside risk to equipment spending.

Economists also see the stimulus from last year's tax incentives fading in 2027. Tighter financial conditions amid rising inflation because of the US-Israeli war with Iran were also seen imposing some drag. The Federal Reserve raised its benchmark overnight interest rate to the 3.75%-4.00% range last month, but was expected to keep borrowing costs unchanged ​on Wednesday.

"Survey measures of capex intentions, however, also suggest that core equipment investment will lose momentum ahead, with a slowdown especially likely if the recent surge in borrowing costs is sustained," said Oliver Allen, senior US economist at Pantheon Macroeconomics. Orders for durable goods, items ranging ⁠from toasters to aircraft that are meant to last three years or more, advanced 1.8% in September after edging up 0.1% in August. They increased 8.0% year-on-year in September. Durable goods were boosted over the month by a 4.6% jump in transportation equipment orders.

Motor vehicles and parts orders rose 0.3%, while the volatile civilian aircraft orders component soared 28.4%. Boeing reported on its website that it ⁠had ​received 165 orders for aircraft, a surge from only 15 in August. Separately, the Conference Board said its consumer confidence index increased 7.5 points to 91.7 in October, attributed to an easing in gasoline prices. Consumers also grew more optimistic about the labor market. The survey's so-called labor market differential rose to 5.3% from 2.9% in September.

This measure, derived from consumers' views on whether jobs are "plentiful" or "hard to get," correlates to the unemployment rate in the Labor Department's monthly employment report. Still, consumers remained disgruntled about the higher cost of living, with Conference Board Senior Economist for Global Indicators Fergus McCormick noting that "references to ⁠prices, the high cost of food and groceries, and oil and diesel prices rose" among write-in responses this month.

Consumers planned to spend less on services and durable goods over the next six months. More, however, intended to buy a house. That is despite the 30-year fixed mortgage rate being above ⁠7%. House prices are also still increasing. The Federal Housing Finance Agency said on ⁠Tuesday single-family house prices advanced 2.4% in the 12 months through August, after rising 2.5% year-on-year in July. House prices have remained elevated even as higher borrowing costs depress demand, likely reflecting limited supply.

A fourth report from the Census Bureau showed sales of new single-family homes fell 0.6% to a seasonally adjusted annualized rate of 676,000 units in September. They declined 5.3% on a year-over-year basis. "Higher rates may send buyers to the sidelines, but they'll also make ‌would-be sellers less enthusiastic about listing their homes for ‌sale, which will keep inventories in the resale market tight and place a floor under home price appreciation," said Matthew Martin, senior US economist at Oxford ​Economics.