U.S. business equipment spending remains strong, even when new orders were planned in July

WASHINGTON, Aug 25 (Reuters) – New orders for key capital goods made in the United States were unexpectedly flat in July amid supply restrictions and a shift in demand for services, suggesting that Business spending on equipment could slow in the second half after strong growth last year.

Still, business investment in equipment remains strong, with Wednesday’s Commerce Department report showing shipments of those accelerated capital goods last month. Orders are 18% above their pre-pandemic levels. Investment in equipment is expected to help offset the cooling of consumer spending and keep the economy on a solid growth path this quarter.

“Overall, July data point to strong growth in equipment spending in the early third quarter,” said Oren Klachkin, a U.S. economist at Oxford Economics in New York. “But with producer prices hot and the recovery leaning in favor of high-contact services, we are likely to see moderate progressive growth in real equipment spending in the second half of 2021.”

Last month’s unchanged reading of orders for non-defense capital goods, excluding aircraft, a monitored proxy for business spending plans, followed a revised upward rise of 1.0% in June. These so-called basic capital goods orders were reported to have advanced 0.7%.

Economists surveyed by Reuters had predicted that orders for basic capital goods would increase by 0.5%. Shipments of basic capital goods rose 1.0% last month after rising 0.6% in June. Basic capital goods shipments are used to calculate equipment expenditure to the extent of government gross domestic product.

Wall Street shares were trading higher. The dollar won against a basket of currencies. US Treasury prices were lower.

Business spending on equipment increased four consecutive quarters of double-digit growth, which helped boost the economy’s recovery from a short and strong COVID-19 pandemic recession, driven by strong demand for goods , thanks to low interest rates and a massive fiscal stimulus.

The slowdown in basic capital goods orders in July probably reflected supply chain bottlenecks, as well as the rotation of spending on goods services. There were decreases in orders for computers and electronic products. The global shortage of semiconductors has hampered the production of these goods.

Orders for electrical equipment, appliances and components also fell. But orders for primary metals, machinery and fabricated metal products increased.

VERY BAD INVENTORIES

With extremely scarce inventories after depleting the first half of the year, orders for basic capital goods are likely to recover in the coming months and strengthen manufacturing, which accounts for 11.9% of the economy. . Uncovered basic capital goods orders rose 0.9% in July after rising 1.2% in June.

“Because production has not held up at the same time as demand, but demand has remained consistently strong, we would expect strong demand to maintain support for production until 2022, as the problems of supply, ”said Veronica Clark, a Citigroup economist in New York.

Recovery capacity is welcome amid signs that consumer spending is cooling, as the Delta variant of the coronavirus causes a resurgence of new infections across the country.

Retail sales fell in July in part due to a shortage of motor vehicles. Credit card data suggests that spending on services such as airfare, cruises, hotels and motels has dropped.

Last week, Goldman Sachs economists lowered their estimate of third-quarter GDP growth to an annualized rate of 5.5% from the 9% rate. Bank of America Securities cut its GDP growth forecast for this quarter at a rate of 4.5% from 7.0%. The economy grew at a rate of 6.5% in the second quarter, surpassing the level of GDP above its maximum in the fourth quarter of 2019.

Durable goods orders, ranging from toasters to airplanes lasting three years or more, fell 0.1% in July after rising 0.8% in June. They were reduced by a 2.2% drop in orders for transport equipment, which followed an increase of 1.4% in June.

Orders for civilian aircraft fell by 48.9%. Boeing (BA.N) reported on its website that it had received 31 aircraft orders last month compared to June 219. Orders for motor vehicles and parts rose 5.8% in July after rising 1.8% in June.

Car manufacturers have been adjusting their production schedules, including previous plant closures to re-equip them in July, to manage chip supply. This probably contributed to the jump in motor vehicle orders last month.

“Make no mistake, self-production continues to struggle to keep up with demand,” said Tim Quinlan, a senior economist at Wells Fargo in Charlotte, North Carolina.

Report by Lucia Mutikani; Edited by Chizu Nomiyama and Andrea Ricci

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