WASHINGTON- New orders for US-made capital goods rebounded more than expected in March, suggesting that business spending on equipment ended the first quarter with strong momentum, though part of the increase reflected higher prices.
While other data on Tuesday showed a dip in consumer confidence this month, households were eager to buy big-ticket items like motor vehicles, television sets and clothing dryers within six months. Consumers were also inclined to buy a house, despite surging mortgage rates and record home prices.
This implies that the economy will continue to expand, though at a moderate pace amid higher borrowing costs as the Federal Reserve tries to quell soaring inflation, ignited in part by massive COVID-19 pandemic relief money from the government and from stretched global supply chains.
“Despite all the hand-wringing over rising interest rates and high inflation, an overlooked positive for economic growth is the fact that capital spending remains intact,” said Tim Quinlan, a senior economist at Wells Fargo in Charlotte, North Carolina. “While demand may soon slow from the break-neck pace over the past two years, the need to replenish still-depleted inventory levels will keep orders rolling in.”
Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, increased 1.0 percent last month, the Commerce Department said. These so-called core capital goods orders fell 0.3 percent in February.
Economists polled by Reuters had forecast core capital goods orders would rebound 0.5 percent. The data are not adjusted for inflation. Surging labor costs amid worker shortages are also expected to keep demand for equipment strong as businesses seek labor-saving technologies.
There were strong increases in orders for electrical equipment, appliances and components, as well as computers and electronic products, machinery, primary metals and fabricated metal products. Orders for transportation equipment advanced 0.2 percent after plunging 4.4 percent in February. Motor vehicle orders accelerated 5.0 percent after rising 0.3 percent in February.
Orders for the volatile civilian aircraft category dropped 9.9 percent after decreasing 27.3 percent in February. Overall, orders for durable goods – items ranging from toasters to aircraft that are meant to last three years or more – increased 0.8 percent last month after declining 1.7 percent in February.
The Fed increased its policy interest rate by 25 basis points last month. The US central bank is expected to hike rates by 50 basis points next week, and soon start trimming its asset holdings.
Though shipments of core capital goods rose 0.2 percent last month, matching the gain in February, that followed a hefty increase in January, leaving business spending on track to again contribute to gross domestic product growth in the first quarter.
Core capital goods shipments are used to calculate equipment spending in the GDP measurement. Demand for goods remains strong even as spending is shifting back to services, keeping manufacturing expanding. But the sector, which accounts for 12 percent of the economy, continues to battle supply bottlenecks, a situation that has been worsened by the war in Ukraine, which has slowed the recovery in global supply chains.
Lockdowns in China to contain a resurgence in COVID-19 cases are also adding to the strain.
