Capital Goods Orders Decrease as Investment Cools
Bookings for capital goods fell in September, signaling a slowdown in U.S. business investment that gives the Federal Reserve more reason to ease policy next week.
Non-military orders for equipment like computers and machinery meant to last at least three years and excluding airplanes dropped 0.6 percent after a 4.8 percent gain in August that was smaller than previously estimated, figures from Commerce Department showed today in Washington. Another report showed sales of new houses hovered near a record low last month.
The reports point to an economy that is struggling to gain speed more than a year into a recovery from the worst recession since the 1930s. Stocks, commodity prices and Treasury securities fell on speculation a renewed program of Fed large- scale asset purchases may not be large enough to spur growth.
“Areas in the economy that were quite hot, like capital spending, have begun to cool and areas that were cold, like housing, have been stabilizing,” said Zach Pandl, an economist at Nomura Securities International Inc. in New York. “The economy is not growing fast enough for the Fed’s liking.”
The Standard & Poor’s 500 Index fell 0.9 percent to 1,175.23 at 12:17 p.m. in New York as shares of Alcoa Inc. and Exxon Mobil Corp. fell, mimicking decreases in metals and crude oil prices. The yield on the benchmark 10-year Treasury note, which moves inversely to process, rose to 2.68 percent from 2.64 percent late yesterday.
Total orders for durable goods climbed 3.3 percent last month, led by a doubling in aircraft demand. The gain exceeded the 2 percent increase projected by the median forecast of 76 economists in the Bloomberg News survey. Estimates ranged from no change to an increase of 8 percent.
Effect on GDP
Shipments of non-defense capital goods excluding aircraft, used in calculating gross domestic product, increased 0.4 percent after a 1.3 percent gain in August that was smaller than previously estimated.
Over the past three months, those shipments climbed at a 9 percent annual pace, down from a 17 jump in the three months through June and indicating business investment cooled last quarter. Last quarter’s GDP report showed spending on equipment and software climbed at a 25 percent annual pace, the biggest gain since 1983, according to Commerce Department data.
Orders for non-defense capital goods excluding aircraft are considered a proxy for future business investment. They increased at a 5.5 percent pace last quarter compared with a 31 percent jump from April through June, pointing to further deceleration in business spending in coming months.
“We’re looking at weakness in capital spending for at least the next couple of quarters,” said Tom Porcelli, senior economist at RBC Capital Markets Corp. in New York, who had predicted a drop in demand. “Companies are unwilling to deploy the enormous amount of cash they have as there’s skepticism about the economic backdrop. We continue to exist in a slow- growth environment.”
U.S. companies are holding almost $1 trillion of cash, according to a report yesterday by Moody’s Investors Service that shows borrowers are still concerned about the recovery.
“Many of our U.S. markets remained weak as a result of the slow recovery in the U.S. economy,” Thomas Linebarger, chief operating officer of Cummins Inc., said during a teleconference with analysts yesterday. He said the company doesn’t “expect to see any meaningful improvement until 2011” in the U.S.
At the same time, Linebarger said business in emerging markets for the Columbus, Indiana-based maker of diesel truck engines “has come back much faster than we had forecast.”
Housing, the industry that precipitated the recession, remains in the doldrums. Sales of new homes rose 6.6 percent in September to a 307,000 annual rate that exceeded the median forecast of economists surveyed by Bloomberg News, figures from the Commerce Department also showed today. Demand is hovering near the 282,000 pace reached in May that was the lowest since records began in 1963.
A lack of jobs is preventing Americans from gaining the confidence needed to buy, overshadowing declines in borrowing costs and prices that are making houses more affordable. At the same time, foreclosure moratoriums at some banks, including JPMorgan Chase & Co., signal the industry will redouble efforts to tighten lending rules, which may depress housing even more.
“These are still very low levels,” said Jim O’Sullivan, global chief economist at MF Global Ltd. in New York. “Ultimately, a significant recovery in housing will depend on a clear pickup in employment.”
The median price of a new house increased 3.3 percent from September 2009 to $223,800, today’s report showed.
Purchases rose in three of four regions, led by a 61 percent jump in the Midwest. Sales fell 9.9 percent in the West.
There were 204,000 new houses on the market at the end of September, the fewest since July 1968.
Homebuilders say labor-market conditions will be the biggest factor in spurring or delaying a recovery.
“The U.S. economy needs to improve, and we’ve got to see some improvement in job creation,” Larry Sorsby , chief financial officer at Hovnanian Enterprises Inc., the largest homebuilder in New Jersey, said during an Oct. 7 conference call.
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