Capital Goods Orders Unexpectedly Drop Most in Three Months
Orders for U.S. business equipment unexpectedly declined in May by the most in three months, pointing to weakness in investment even before the likely damage to confidence stemming from U.K. voters’ decision to leave the European Union.
Bookings for non-military capital goods excluding aircraft dropped 0.7% after falling 0.4% in April, data from the Commerce Department showed June 24. Demand for all durable goods — items meant to last at least three years — slumped more than expected to 2.2%.
Sluggish global demand, the lingering effects of the surge in the dollar last year, weaker corporate profits and a sharp drop in spending in the energy sector have weighed on companies’ investment decisions. American factories are now faced with a new challenge — the fallout from the U.K.’s decision to exit the EU.
After this shock ripples through financial markets, Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, said, he will be watching manufacturing surveys and jobless claims “for any evidence that businesses are getting more cautious.”
“Most consumers aren’t going to have Brexit front and center of their economic decisions, whereas companies, particularly ones that are globally exposed, are going to have to reassess the situation,” Feroli said.
Bookings for business investment were projected to increase 0.4%, according to the median forecast in a Bloomberg News survey, which also called for a 0.5% drop in total durable orders.
The decrease in durable orders was broad-based, with fewer bookings for metals, machinery, computers and motor vehicles, according to the Commerce Department report. Demand for primary metals declined by the most since November, and orders excluding military hardware fell for the third time in four months.
“Orders are likely to remain soft,” Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina, said before the report. “There aren’t a lot of reasons to rush on decisions such as investments.”
Excluding transportation equipment, orders declined 0.3%, the most since February, after a 0.5% advance a month earlier.
Orders for non-defense capital goods excluding aircraft are considered a proxy for future business investment in items such as computers, engines and communications gear. Shipments of those goods, used in calculating gross domestic product, declined 0.5% after climbing 0.6%.
Unfilled orders for those capital goods decreased 0.3% after falling 0.2%.
Other recent reports showed factories are still struggling. Manufacturing production and total industrial production — which also includes mines and utilities — both fell in May, according to Federal Reserve data.
