U.S. business investment looks weak in Q1 as orders rise moderately

Basic capital goods orders rise 0.2% in February Basic capital goods shipments unchanged Business activity picks up in March; weak manufacturing

WASHINGTON, March 24 (Reuters) – New orders for key U.S.-made capital goods rose unexpectedly in February, but data for the previous month was revised down, suggesting capital spending businesses may struggle to rebound in the first quarter.

While an S&P Global survey on Friday showed business activity picking up momentum in March, manufacturing contracted for a fifth consecutive month. Reports likely confirm that the manufacturing sector is in recession, weighed down by higher borrowing costs. With financial conditions tightening following the recent failure of two regional banks, the outlook for both business investment and manufacturing is cloudy.

“We foresee darker times ahead as spending declines, lending standards tighten and higher interest rates than the post-global financial crisis era make it expensive to buy capital goods and investment financing,” said Oren Klachkin, chief U.S. economist at Oxford Economics in New York. . “The recent crisis in the banking sector will only add to the tensions to come.”

Orders for non-military capital goods excluding aircraft, a closely watched indicator of business spending plans, rose 0.2% last month, the Commerce Department said. Data for January has been revised down to show that those core capital goods orders rose 0.3% instead of 0.8% as previously reported.

Basic capital goods

Economists polled by Reuters had expected core capital goods orders to remain unchanged. Orders for underlying capital goods rose 4.3% year-on-year in February. Data is not adjusted for inflation. Producer prices for finished goods, excluding food, outpaced monthly gains in orders for basic capital goods.

This means that inflation-adjusted orders were weak. The report is consistent with the Federal Reserve Bank’s regional factory surveys showing that the business climate remains depressed so far this year.

This was reinforced by the S&P Global survey showing its flash manufacturing PMI climbed to 49.3 in March from 47.3 in February. The manufacturing sector, which accounts for 11.3% of the U.S. economy, has contracted for two straight quarters as rising interest rates have sapped demand for goods, which are usually bought on credit.

Flash PMI

Spending is also shifting from goods to services, while past dollar appreciation and weak global growth are dampening exports. The inventory cycle is also turning around, with business restocking slowing.

The tightening of lending standards by banks following the recent turmoil in financial markets is expected to make credit less available to households and businesses.

The Federal Reserve on Wednesday raised its benchmark overnight interest rate by a quarter of a percentage point, but signaled that it was about to pause further increases in borrowing costs, in a nod to tensions in the financial markets.

Stocks on Wall Street fell on renewed fears of contagion in the banking sector. The dollar appreciated against a basket of currencies. US Treasury prices were higher.

HIT TO INVESTMENT

“Although the extent of the drag of events over the past two weeks remains to be seen, it would be a surprise if this did not deal an additional blow to investment, especially for smaller businesses more dependent on bank financing” , said Andrew. Hunter, deputy chief US economist at Capital Economics.

Last month, orders for electrical equipment, appliances and components, fabricated metal products as well as primary metals increased. But orders for computers and electronics fell, and machinery fell.

Shipments of basic capital goods remained unchanged after rising 0.9% in January. Basic capital goods shipments are used to calculate capital expenditures in the gross domestic product measure. Shipments of non-military capital goods, which also enter into the calculation of GDP, fell 0.6% after falling 1.7% in January.

Goldman Sachs economists cut their estimate for first-quarter GDP growth to an annualized 2.4% from a 2.6% pace. Business capital expenditure contracted in the fourth quarter, which helped limit GDP growth to a rate of 2.7%. The economy grew at a 3.2% pace in the third quarter.

“The manufacturing sector is in a recession and will be a drag on the whole economy,” said Conrad DeQuadros, senior economic adviser at Brean Capital in New York. “Business capital spending may contract in real terms in the first quarter GDP report.”

Orders for items ranging from toasters to airplanes that are expected to last three years or more fell 1.0% in February. These orders for so-called durable goods fell 5.0% in January.

Durable goods orders last month were dragged down by a 6.6% decline in the volatile civil aircraft category, which followed a 56.3% plunge in January. Boeing (BA.N) said on its website that it received just five plane orders in February, down sharply from 55 in January.

Transportation equipment orders fell 2.8% after falling 14.0% in January. Motor vehicle orders fell 0.9%.

Durable goods

Unfilled orders by manufacturers fell 0.1% after remaining unchanged in January, which does not bode well for factory production. Factory inventories rebounded 0.2%.

“As inventories rise, container volume to U.S. ports is declining, suggesting shipments could weaken further in the coming months,” said Erik Johnson, senior economist at BMO Capital Markets in Toronto.

Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci

Our standards: The Thomson Reuters Trust Principles.

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