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U.S. Capital Goods Orders Decline Most Since November

Photographer: Daniel Acker/Bloomberg

A Caterpillar Inc. 330DL track excavator outside Williston, North Dakota. Close

A Caterpillar Inc. 330DL track excavator outside Williston, North Dakota.

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Photographer: Daniel Acker/Bloomberg

A Caterpillar Inc. 330DL track excavator outside Williston, North Dakota.

Demand for U.S. capital goods such as machinery and communications gear dropped in July by the most in eight months, a sign manufacturing will contribute less to the economic expansion.

Bookings for non-military capital equipment excluding planes slumped 3.4 percent, a Commerce Department report showed today in Washington. Total orders for durable goods, those meant to last at least three years, jumped 4.2 percent, paced by a 54 percent surge in demand for civilian aircraft.

Possible U.S. tax increases and spending cuts may prompt companies to rein in spending, while a global economic slowdown threatens overseas sales of companies such as Caterpillar Inc. (CAT) and Deere & Co. Federal Reserve policy makers have signaled they are prepared to take further steps to sustain the recovery if growth doesn’t pick up.

“There’s uncertainty domestically about the tax environment, and there’s uncertainty globally about the outcome of the European crisis,” said Millan Mulraine, a senior U.S. strategist at TD Securities in New York, who correctly projected the overall gain in orders. This is “not engendering business investment and hiring,” he said. “This would bolster the case for the Fed, suggesting that the soft underbelly of the recovery may be extending into the third quarter.”

Stocks rose, paring the Standard & Poor’s 500 Index’s first weekly decline in almost two months, as the drop in orders increased speculation the Fed will provide additional stimulus. The S&P 500 Index climbed 0.7 percent to 1,411.13 at the close in New York. The yield on the benchmark 10-year Treasury note was little changed at 1.68 percent from late yesterday.

U.K. Economy

In the U.K., the economy shrank less in the second quarter than initially estimated after construction and production output were revised, figures today showed. The revision may not change the broader view of the economy as it struggles to recover amid the government’s fiscal squeeze and the fallout from the euro-area debt crisis.

The median forecast of 75 economists surveyed by Bloomberg called for a 2.5 percent gain in total U.S. durable goods orders. Estimates ranged from a decline of 2.5 percent to a 7 percent increase.

Bookings for non-defense capital goods excluding aircraft are considered a proxy for future business investment in items such as computers, engines and communications gear. The report prompted economists at Morgan Stanley in New York to reduce their forecast for the gain in third-quarter business investment to 1 percent. It increased at a 7.2 percent annual rate in the previous three months.

Machinery Demand

Last month’s drop reflected a 3.6 percent decrease in demand for machinery and a 4 percent slump in communications equipment. Figures for the prior month were also revised down to show a 2.7 percent decline for June, which was previously estimated as a 1.7 percent fall.

Shipments of capital goods, used in calculating gross domestic product, were unchanged in July after rising 1.5 percent the prior month.

Civilian aircraft bookings surged in July after rising 33 percent gain the prior month. Boeing Co. (BA), the largest U.S. aircraft maker, said it received 260 orders last month, up from 24 in June.

Regional reports indicate a slowdown for factories in August. Manufacturing in the Philadelphia region shrank for the fourth consecutive month, while New York-area factories unexpectedly contracted for the first time in 10 months.

Policy Debate

The lingering domestic fiscal policy debate could be holding back orders for companies like Caterpillar as businesses await the end-of-year “fiscal cliff” deadline.

“One of the drags that we see right now, and we hear this actually from the field, is that uncertainty around the tax increases at the end of the year,” Michael DeWalt, director of investor relations at the Peoria, Illinois-based construction equipment manufacturer, said at an Aug. 8 conference. The government spending cuts at the end of the year are also “making everybody nervous and are probably delaying purchases,” he said.

The so-called fiscal cliff represents more than $600 billion in higher taxes and reductions in defense and other government programs next year that will occur automatically without action by U.S. lawmakers, threatening to push the economy into recession.

The global slump is also a headwind. Moline, Illinois-based Deere cut its full-year profit forecast Aug. 15 as sales slow in Asia and Latin America, undermining the growth strategy at the world’s largest manufacturer of agricultural equipment.

Order Cancellations

Boeing has been influenced. The Chicago-based plane maker this week lost an order for 35 Dreamliners with a list price of $8.5 billion in the biggest 787 cancellation yet as Australia’s Qantas Airways Ltd. scrapped a contract after deliveries were delayed and demand cooled. Cathay Pacific Airways Ltd. and Singapore Airlines Ltd. are among foreign carriers that have also pulled back as international travel has slowed.

The auto industry has been one of the economy’s few bright spots, even as vehicle purchases declined in July from the prior month. The industry bolstered the U.S. economy with first-half sales up 15 percent, setting a pace for more than 14 million annual sales and the best year since 2007.

Today’s data showed orders for motor vehicles and parts climbed 13 percent in July, today’s report showed.

The Fed signaled this week that it’s ready to take additional steps to spur the recovery. Many policy makers said additional stimulus probably will be needed soon unless the economy shows signs of a durable pickup, according to minutes of the central bank’s most recent meeting.

“Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery,” according to the record of the Federal Open Market Committee’s July 31-Aug. 1 gathering.

To contact the reporters on this story: Michelle Jamrisko in Washington at mjamrisko@bloomberg.net; Alex Kowalski in Washington at akowalski13@bloomberg.net

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

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