Equipment Orders Bolster Case for U.S. Growth Snapback
American factories received more orders for business equipment in May, pointing to gains in investment that will help the economy snap back from a first-quarter plunge.
Bookings (CGNOXAI%) for capital goods such as computers, a proxy for business spending, rose 0.7 percent after falling 1.1 percent in April, according to data from the Commerce Department issued today in Washington. Revised figures showed gross domestic product from January through March declined 2.9 percent at an annualized rate, the biggest drop-off since the depths of the last recession in 2009.
The increase in orders, combined with gains in employment, shows improving sales are giving companies the confidence to expand. Paced by growing demand for automobiles and housing, manufacturers will probably boost production to restock warehouses, lifting growth into the second half of 2014.
“All of the elements are in place to suggest that growth will be much stronger in the second quarter,” said Eric Green, global head of foreign exchange and rates at TD Securities USA LLC in New York. “You’ve got jobs, you’ve got investment spending turning higher.”
Stocks rose for the first time in three days as investors speculated the economy is recovering from a first-quarter contraction. The Standard & Poor’s 500 Index climbed 0.5 percent to 1,959.53 at the close in New York.
The Commerce Department last month had estimated GDP dropped at a 1 percent pace in the first quarter. Today’s downgrade, mainly reflecting less consumer spending on health care and a wider trade deficit, was the biggest from the government’s second estimate in records going back to 1976.
Consumer purchases, which account for about 70 percent of the economy, rose at a 1 percent annualized rate in the first quarter, the weakest pace in five years. The Bureau of Economic Analysis had estimated that major provisions of President Barack Obama’s signature health care law would boost outlays and instead a survey earlier this month showed a decline.
The first-quarter slump doesn’t reflect the underlying strength of the economy, said Sam Coffin, an economist at UBS Securities LLC in New York and the best GDP forecaster over the past two years, according to data compiled by Bloomberg. “For the second quarter, we’ll see some weather rebound and a return to more normal activity after that long winter.”
The economy will expand at a 3.5 percent rate in the second quarter and average 3.1 percent in the last half of the year, according to the median projection economists surveyed by Bloomberg from June 6 to June 11.
Some economists raised their projections for the second quarter following today’s reports. Analysts at Morgan Stanley in New York boosted the estimate to 3.8 percent from 3.6 percent, while counterparts at Barclays Plc took it to 4 percent from 3 percent.
Bookings for non-military capital goods excluding aircraft is the category from today’s Commerce Department report that is considered a proxy for future business investment. Shipments (CGSHXAI%) of those goods, used in calculating GDP, climbed 0.4 percent in May after dropping 0.4 percent the prior month.
“Businesses tend to invest when the outlook improves,” said Patrick Newport, an economist with IHS Global Insight in Lexington, Massachusetts. “We’re seeing slightly stronger increases in capital-goods spending. It’s the economy that’s driving it.”
Demand for all durable goods -- items meant to last at least three years --decreased 1 percent, reflecting declines in the volatile transportation and defense categories, according to today’s report. It included a 4 percent decrease in demand for commercial aircraft and a 31.4 percent slump in orders for military capital equipment.
Factories are being helped by further gains in auto demand. Cars and light trucks sold at a 16.7 million pace in May, the fastest rate since February 2007. Today’s durable goods report showed a 2.1 percent increase in orders for motor vehicles and parts.
PPG Industries Inc. (PPG), a Pittsburgh-based maker of protective and decorative coatings and glass, is seeing volume growth in the U.S. as demand for automotive parts and accessories grows.
“It’s been a positive story for us,” Executive Vice President Viktoras R. Sekmakas said in a June 5 presentation. “We feel bullish on the U.S. market.”
Residential real estate also is providing support to manufacturing. Sales of new and previously owned homes rose in May, reports showed earlier this week. The prospect for further labor market gains is helping keep homebuilders such as Hovnanian Enterprises Inc. upbeat about the housing rebound.
“A pickup in the overall U.S. economy -- particularly one that is driven by the creation of well-paying jobs -- will go a long way toward accelerating the recovery of the housing market across the country,” Ara Hovnanian, president and chief executive officer of the Red Bank, New Jersey-based company, said on a June 4 earnings call.
Employers added 217,000 workers to payrolls in May, lifting the average monthly advance so far this year to 213,600, the most for a year’s average since 1999.
“The economy is growing, and it’s getting healthier with every passing quarter,” said Michelle Girard, chief U.S. economist at RBS Securities Inc. in Stamford, Connecticut. “It continues to show gradual improvement.”