U.S. Capital Goods Orders, Pending Home Sales Increase

Orders for U.S. capital goods rose in August more than previously estimated, a sign companies are replacing outdated equipment. Total bookings dropped, pulled lower by weaker demand for aircraft.

Orders for non-military capital goods excluding planes increased 5.1 percent, the biggest gain since March, the Commerce Department said today in Washington. Last month’s durable goods report showed such orders rose 4.1 percent. The 0.5 percent decrease in total bookings compared with a 0.4 percent drop projected by the median forecast of economists in a Bloomberg News survey.

Manufacturing will remain at the forefront of the recovery as companies use their large cash reserves to update equipment and cut costs. Federal Reserve Bank of New York President William Dudley last week said more monetary easing is probably needed to spur growth and avert deflation.

“The trend in business investment is still quite solid,” said James O’Sullivan, global chief economist at MF Global Ltd. in New York. “Business investment is still one of the stronger parts of the economy. There is certainly no collapse here, though we are seeing a fading from the contribution from inventories and certainly the trend in manufacturing output has slowed.”

The median forecast was based on a survey of 64 economists. Estimates ranged from a drop of 1 percent to a 0.3 percent increase.

Pending Sales

A report from the National Association of Realtors showed pending sales of existing homes climbed more than forecast in August. Signed contracts increased 4.3 percent after a 4.5 percent increase in July, indicating housing demand is stabilizing after reaching record lows. The median forecast of economists surveyed projected a 2.5 percent increase.

Stocks were little changed after the reports. The Standard & Poor’s 500 Index fell less than 0.1 percent to 1,145.57 at 10:33 a.m. in New York. Treasury securities rose, sending the yield on the benchmark 10-year note down to 2.49 percent from 2.51 percent late on Oct. 1.

The increase in orders for capital goods excluding aircraft and military equipment, a measure of future business investment, followed a 5.3 percent drop in July. The Commerce Department’s 4.1 percent initial estimate was reported in the Sept. 24 report on durable goods.

Shipments of these goods, used in calculating gross domestic product, rose 1.7 percent.

Smaller Slowdown

The durable-goods report prompted economists at Morgan Stanley to raise their estimate for third-quarter growth in business investment in equipment and software to 11.5 percent from 5 percent and to boost their forecast for economic growth by a half percentage point. Business spending surged at a 25 percent rate in the second quarter, the biggest gain since 1983.

Demand for durable goods, which make up just over half of total factory demand, fell 1.5 percent. The government reported on Sept. 24 that bookings for these items decreased 1.3 percent in August.

Bookings of non-durable goods, including food, petroleum and chemicals, increased 0.3 percent, led by a gain in demand for chemicals and fertilizers.

Manufacturing expanded in September at the slowest pace in 10 months, reflecting declines in orders and production, the Institute for Supply Management reported last week.

Less Restocking

Factory inventories climbed 0.1 percent in August, today’s report showed after a 0.9 percent increase the prior month. The figures suggest stockpile rebuilding was less of a boost to growth last quarter. Manufacturers had enough goods on hand to last 1.27 months at the current sales pace, the most since November.

The report may ease concern among Fed policy makers. “The pace of recovery in output and employment has slowed in recent months,” the Fed said Sept. 21 after its latest policy meeting. “Business spending on equipment and software is rising, though less rapidly than earlier in the year.”

Not all companies are seeing improvement. Advanced Micro Devices Inc., the second largest maker of microprocessors, on September 23 cut its third-quarter sales forecasts, citing weaker demand for notebook computers in Europe and North America.

The announcement followed similar forecast reductions by Texas Instruments Inc. and Intel Corp., citing weaker demand.

The economy is a top issue for voters in the November congressional elections, and polls show the public is increasingly skeptical of President Barack Obama’s performance.

Last week, Obama signed legislation that will cut taxes and provide credit help for small businesses, calling it an essential step for job growth in a slow economy.

To contact the reporter on this story: Bob Willis in Washington bwillis@bloomberg.net;

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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