Capital Goods Demand Signals Stronger U.S. Growth: Economy

Orders for long-lasting goods such as computers and machinery climbed in November by the most in 10 months and new-home sales exceeded forecasts, showing a more broad-based U.S. economic expansion entering 2014.

Bookings for non-military capital equipment excluding aircraft, a proxy for future business investment, increased 4.5 percent, more than double the most-optimistic projection in a Bloomberg survey of economists, a Commerce Department report in Washington showed. Home sales eased to a 464,000 annual rate from a revised 474,000 pace in October that was the fastest since July 2008.

Manufacturing is adding fuel to the expansion as assembly lines respond to stronger demand for motor vehicles and home-construction materials. A sustained pickup in investment in new equipment, along with increased consumer spending and the prospect of smaller federal budget cuts, is making companies more confident in the economic outlook.

“This economy is getting ready to kick it up a notch,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, who correctly forecast the orders gain. “Consumers are feeling confident enough to buy the biggest of big-ticket items, the family home, and companies are seeing enough demand to buy equipment at close to record levels.”

Stocks rose, extending records for benchmark indexes, after the reports. The Standard & Poor’s 500 Index advanced 0.3 percent to 1,833.32 at the close in New York. U.S. equity markets closed at 1 p.m. today before the Christmas holiday.

All Durables

The gain in business-equipment demand helped drive a 3.5 percent increase in orders for all durable goods last month. The median estimate of 75 economists surveyed by Bloomberg called for a 2 percent advance.

Today’s report also helped alleviate concern that a buildup in inventories, which accounted for 1.7 percentage points of the 4.1 percent annualized gain in third-quarter economic growth, would lead to cutbacks in production. Stockpiles increased at a $115.7 billion pace, the most in three years.

The durable goods inventory-to-shipments ratio, which measures how long such stockpiles will last at the current sales pace, fell to 1.61 months in November, the lowest since March 2011, from 1.64 months.

“The inventory unwind may not be as pronounced as we thought,” said Gennadiy Goldberg, an economist at TD Securities USA LLC in New York. “This could substantially increase growth in the fourth quarter.”

Manufacturer Sentiment

The report also brings durable goods orders more in line with recent private data showing building confidence among the nation’s manufacturers. The Institute for Supply Management’s gauge of factory activity has advanced for six straight months, reaching a more than two-year high in November. Bookings for capital equipment declined in September and October.

“For the last three months, the ISM has shown considerable acceleration in manufacturing with particular strength in new orders, while this report suggested far weaker orders,” said John Ryding, chief economist at RDQ Economics in New York. “However, the November durables report is strong across the board and the two sets of indicators are now telling a similar story.”

The durable goods data were boosted by a 21.8 percent surge in bookings for non-military aircraft, according to the Commerce Department’s report. Boeing Co., the Chicago-based aerospace company, said it received orders for 110 aircraft in November, up from 79 in October.

Demand for vehicles also contributed, with orders climbing 3.3 percent, the most since February. Auto sales advanced to a 16.3 million annualized rate in November, the highest since May 2007, according to data from Ward’s Automotive Group.

Minus Transportation

Excluding demand for transportation equipment, orders were up 1.2 percent, the biggest advance in six months, after a 0.7 percent rise a month earlier. They were projected to rise 0.7 percent, according to the Bloomberg survey median.

The November increase in orders for non-defense capital goods excluding aircraft followed a 0.7 percent decrease a month earlier. The Bloomberg survey median called for a 0.7 percent gain, with estimates ranging from a 0.3 percent drop to a 2 percent increase.

Shipments of those goods, used in calculating gross domestic product, climbed 2.8 percent, the biggest gain since March 2012.

Factories are also benefiting from sustained improvement in the housing market, which has boosted demand for materials, construction equipment and appliances. New-home sales in November exceeded the Bloomberg survey median of 440,000. The Commerce Department revised up data for each month back to August.

This Year

The market is on pace to reach 435,100 new homes sold this year, the most since 2008, according to data compiled by Bloomberg from the agency’s reports. Further construction gains may be forthcoming as the supply of homes dropped to 4.3 months, the lowest since June, from 4.5 months in October.

Housing is withstanding higher borrowing costs. The average fixed rate on a 30-year mortgage was 4.47 percent in the week ended Dec. 19, according to McLean, Virginia-based Freddie Mac. The rate reached a record low of 3.31 percent a year ago and was at 3.35 percent as recently as May.

Homebuilders such as Los Angeles-based KB Home see the rise in interest rates as a short-term “pause” for buyer demand that won’t crimp an acceleration in the housing recovery next year.

“Higher mortgage rates, higher home prices and lower consumer confidence due to uncertainty in Washington triggered a pause among homebuyers who are now being more cautious,” Chief Executive Officer Jeffrey Mezger said on a Dec. 19 earnings call. “Affordability is at attractive levels, demographics remain strong and there’s pent-up demand due to delayed household formation” that will support the market in 2014.

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