Capital-Goods Orders Signal Slower U.S. Investment

American factories received fewer orders for machinery, communications gear and computers in February, signaling business investment is slowing after an unusually harsh winter put a damper on sales.

Bookings for non-military capital goods excluding aircraft fell 1.3 percent after a 0.8 percent gain in January that was smaller than initially reported, data from the Commerce Department showed today in Washington. The category, which is part of the durable goods report, is considered a proxy for the corporate-spending prospects.

Frigid temperatures and snow across much of the country have clouded the outlook on the U.S. economy by restraining the housing rebound and consumer spending. Eaton Corp. is among companies trying to determine if the slowdown in sales is more than just weather related.

“Demand momentum has slowed somewhat,” said Ryan Wang, an economist at HSBC Securities USA Inc. in New York. “The bad weather and the winter probably aggravated the downturn somewhat.” Wang is among the most accurate forecasters for capital-goods orders.

Stocks fell, erasing gains that sent the Standard & Poor’s 500 Index to within three points of a record, on concern the situation in Ukraine may escalate after President Barack Obama said the international order is being tested. The Standard & Poor’s 500 Index declined 0.7 percent to 1,852.56 at the close in New York.

Total Goods

Demand for all durable goods -- items meant to last at least three years -- climbed a more-than-forecast 2.2 percent, reflecting the biggest gain in automobile demand in a year.

Forecasts for total orders in the Bloomberg survey ranged from an increase of 3 percent to a 1.5 percent drop. January’s figure was revised to show a 1.3 percent drop from a previously reported 1 percent decline.

Excluding transportation equipment, where demand often is volatile month to month, orders increased 0.2 percent after a 0.9 percent gain in January.

It remains unclear if weather is masking underlying weakness in the economy, according to Richard Fearon, chief financial officer at Eaton, which is based in Dublin and operates out of Cleveland. Eaton makes auto parts, electrical gear and hydraulics for construction equipment.

“We don’t see quite the employment growth that had been hoped and there are some areas where the growth in income, the growth in sales aren’t quite what people had hoped,” Fearon said at a March 20 conference. At the same time, I don’t “see in our order patterns evidence that it is more than just weather.”

Shipments Climb

Shipments of non-military capital goods excluding aircraft, used in calculating gross domestic product, climbed 0.5 percent in February after a 1.4 percent drop the prior month that was larger than previously estimated, today’s report showed.

The pace of such sales rose at a 5.1 percent annualized rate over the past three months compared with a 7.8 percent advance in the fourth quarter, indicating business investment is cooling in the first three months of this year.

Economists at Morgan Stanley in New York lowered their tracking estimate for business-equipment spending after the report, projecting a 3 percent annualized gain from January through March compared with the 5.1 percent advance previously forecast. It rose at a 10.6 percent in the last three months of 2013, according to Commerce Department figures.

Spending Less

Companies including Wet Seal Inc. are holding back on investments until they see an improvement in demand. The Foothill Ranch, California-based clothing retailer last week reported revenue for the quarter ended January that was lower than the same period the prior year.

“Our capital spending plans for fiscal 2014 are conservative and reflect our decision to take a more prudent approach to investments until the business regains strength,” Steven Benrubi, Wet Seal’s chief financial officer, said in a March 21 earnings call. Net capital expenditures will range from $10.5 million to $11.5 million, Benrubi said, almost half of last year’s $20.4 million.

Cleveland-based Parker-Hannifin Corp., a maker of gears, pumps and valves, is among companies seeing steady, if unspectacular, gains in demand.

“We’re growing very well in the Asia-Pacific region right now, slow and steady in the U.S., slow and steady in Europe,” Jon Marten, its chief financial officer, said at a March 18 investor conference. “This is something that has been just a slow steady grind.”

Auto Demand

One bright spot in today’s report was demand for autos. Orders for motor vehicles and parts climbed 3.6 percent in February, the biggest gain since the same month last year.

Pent-up demand has boosted sales of cars, appliances, electronics and other equipment. The average age of cars on the road is at a record 11.4 years, according to data from IHS Automotive. Low interest rates and increasing consumer confidence also are helping dealerships and manufacturers.

Today’s durable goods report runs counter to other manufacturing data that have shown gains in orders and production. The Institute for Supply Management’s factory index rose more than projected in February, while Fed data showed production climbed by the most in six months.

‘Cautionary Note’

If durable goods “was our only window on U.S. manufacturing conditions, it would be a troubling one,” John Ryding, chief economist at RDQ Economics in New York, wrote in a report. “It is our judgment that the durable goods report is a less useful yardstick for measuring manufacturing activity than some other indicators,” including the Fed’s production and the ISM figures, he wrote. “However, we cannot entirely dismiss this report and we have to view it as sounding a cautionary note on our thesis of manufacturing optimism for 2014.”

Data tomorrow are projected to show the world’s largest economy grew at a 2.7 percent annualized rate in the fourth quarter, up from a prior estimate of 2.4 percent and reflecting a bigger gain in consumer spending, according to the median forecast of economists surveyed by Bloomberg.

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