Demand for U.S. Capital Goods Climbs Less Than Forecast

Sept. 25 (Bloomberg) -- Bloomberg’s Julie Hyman examines U.S. durable goods demand for the month of August, which saw an unexpected gain of 0.1 percent. She speaks on Bloomberg Television’s “In The Loop.”

Orders for goods such as computers and machinery rose less than forecast in August, showing a pickup in U.S. business spending will take time to develop.

Bookings (CGNOXAI%) for non-military capital equipment excluding aircraft increased 1.5 percent after a 3.3 percent drop in July, the Commerce Department reported today in Washington. The median forecast of economists surveyed by Bloomberg projected a 2 percent gain. Another report showed sales of new houses over the past two months were the weakest of the year.

Factory production is stabilizing as Americans replace older-model cars and companies invest in new technology. An escalating budget battle in Washington and higher interest rates mean companies will need to see bigger gains in sales to justify updating equipment, which will probably limit any rebound in manufacturing.

Orders are “rising, but they’re rising modestly,” said Kevin Logan, chief U.S. economist for HSBC Securities USA Inc. in New York, the second-best forecaster for capital goods orders over the past two years, according to data compiled by Bloomberg. “Until businesses are more confident about the growth in underlying demand, they’ll be cautious as far as adding capacity.”

Photographer: Ty Wright/Bloomberg

A forklift operator drives through a row of automated teller machines (ATMs) waiting to be shipped at the Diebold Inc. manufacturing facility in Greensboro, North Carolina. Close

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Photographer: Ty Wright/Bloomberg

A forklift operator drives through a row of automated teller machines (ATMs) waiting to be shipped at the Diebold Inc. manufacturing facility in Greensboro, North Carolina.

Stocks fell, giving the Standard & Poor’s 500 Index its longest slump this year, as Wal-Mart Stores Inc. retreated and concern grew that a political showdown over government spending poses a threat to growth. The S&P 500 fell 0.3 percent to 1,692.77 at the close in New York, its fifth straight losing session.

Government Default

U.S. Treasury Secretary Jacob J. Lew today stepped up pressure on Congress to avert a potential federal government default, telling lawmakers in a letter that measures to avoid breaching the debt ceiling will be exhausted on Oct. 17.

Purchases of new houses rose 7.9 percent in August to a 421,000 annualized pace, other figures from the Commerce Department showed today. Demand slumped 14.1 percent in July, more than previously estimated, to a 390,000 rate as expectations that the Federal Reserve would soon trim stimulus pushed up mortgage rates.

The August and July readings were the weakest back-to-back since November and December, and compared to a 446,000 rate on average in the first six months of 2013.

The data highlight the risk that the run-up in borrowing costs poses for the housing rebound, which has boosted growth the past two years. Fed policy makers last week refrained from reducing the $85 billion pace of monthly bond buying, saying the tightening of financial conditions, if sustained, could slow the pace of improvement in the economy.

Mortgage Rates

The rate on 30-year home loans averaged 4.50 percent in the week ended Sept. 19, close to the highest level since July 2011, according to data from McLean, Virginia-based Freddie Mac. The rate, which was as low as 3.81 percent at the end of May, began rising since Fed Chairman Ben S. Bernanke that month indicated the central bank may slow asset purchases.

“The jump in mortgage costs is a significant factor in home purchase decisions, so the housing recovery will abate to some degree,” said Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit. At the same time, “inventories are still tight. There is still room on the supply side for builders to continue building more homes.”

A housing rebound in the U.K. is also putting the industry on its central bank’s radar. The Bank of England today said Britain’s housing-market recovery is gaining momentum and its Financial Policy Committee is ready to act if any risks to stability emerge. Recent data have shown home prices there rising at the fastest pace in seven years.

Durable Goods

Today’s U.S. Commerce Department’s report on goods orders also showed demand for all durable goods, those meant to last at least three years, rose 0.1 percent after plunging 8.1 percent in July.

Forecasts for total durable goods orders in the Bloomberg survey of economists ranged from a drop of 4.5 percent to a 5.5 percent advance. The decline in July was revised from a previously reported 7.4 percent drop.

Demand for non-defense capital goods excluding aircraft is considered a proxy for future business investment in equipment such as computers and electronics. Last month’s increase was the biggest since May.

Shipments of those products, a measure used to calculate gross domestic product, advanced 1.3 percent in August after declining 1.4 percent the prior month. Sales were down 3.3 percent over the past three months at an annualized rate, compared with a 0.9 percent decline at the end of the second quarter, indicating business investment will take time to rebound.

Auto Sales

One bright spot for manufacturers is growth in demand for motor vehicles. Cars and light trucks sold at a 16 million annualized rate last month, the fastest since November 2007, figures from Ward’s Automotive Group showed. Sales at General Motors Co. (GM), Ford Motor Co. (F), Toyota Motor Corp. (7203) and Honda Motor Co. exceeded analysts’ estimates last month.

Purchases of big-ticket items like autos are improving as household balance sheets mend. Rising stock and home prices pushed up the net worth of households and non-profit groups by $1.34 trillion in the second quarter, to $74.8 trillion, the Federal Reserve said today from Washington in its financial accounts report.

United Technologies Corp. (UTX), a global supplier of technology and industrial equipment to aerospace and building companies, is also seeing signs of improvement in commercial construction, Chief Financial Officer Gregory Hayes said.

“We have seen very solid order growth in the first half of the year, which gives us high confidence of the back half of the year,” Hayes said at a Sept. 17 conference. “Commercial property prices especially are recovering. Vacancy rates are slowly coming down. So I think people generally feel good about the commercial construction opportunities here in the U.S.” UTC is based in Hartford, Connecticut.

To contact the reporters on this story: Lorraine Woellert in Washington lwoellert@bloomberg.net; Victoria Stilwell in Washington vstilwell1@bloomberg.net

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

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