US core capital goods orders rise in February; January orders revised down

By Lucia Mutikani

WASHINGTON (Reuters) -New orders for key U.S.-manufactured capital goods unexpectedly rose in February, but data for the prior month was revised sharply down, suggesting that business spending on equipment could be struggling to rebound in the first quarter.

Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, increased 0.2% last month, the Commerce Department said on Friday.

Data for January was revised lower to show these so-called core capital goods orders rising 0.3% instead of 0.8% as previously reported. Economists polled by Reuters had forecast core capital goods orders unchanged.

Core capital goods orders advanced 4.3% on a year-on-year basis in February. The data is not adjusted for inflation.

The report is consistent with regional Federal Reserve factory surveys showing business sentiment remaining depressed so far this year. Manufacturing, which accounts for 11.3% of the U.S. economy, has contracted for two straight quarters as higher borrowing costs undercut demand for goods, which are typically bought on credit.

Spending is also shifting away from goods to services, while the dollar’s past appreciation and sluggish global growth are curbing exports. The inventory cycle is also turning, with restocking by businesses slowing.

A recent tightening in financial conditions in the aftermath of the failure of two regional banks casts a shadow over the outlook for demand. There are expectations that the resulting tightening of lending standards by banks could 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 indicated it was on the verge of pausing further increases in borrowing costs, in a nod to the recent financial market stress.

Last month, there were increases in orders for electrical equipment, appliances and components, fabricated metal products and well as primary metals. But orders for computers and electronic products dipped and machinery fell.

Shipments of core capital goods were unchanged after increasing 0.9% in January. Core capital goods shipments are used to calculate equipment spending in the gross domestic product measurement.

“Even assuming no significant weakness in orders in March, that suggests real business equipment investment declined again in the first quarter,” said Andrew Hunter, deputy chief U.S. economist at Capital Economics.

“While the extent of the drag from events over the past couple of weeks remains to be seen, it would be a surprise if it didn’t deal a further blow to investment, particularly for small firms more reliant on bank financing”

Business spending on equipment contracted in the fourth quarter, helping to restrain GDP growth to a 2.7% annualized rate. The economy grew at a 3.2% pace in the third quarter.

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

Durable goods orders last month were pulled down by a 6.6% decline in the volatile civilian aircraft category, which followed a 56.3% plunge in January. Boeing reported on its website that it had received just five aircraft orders in February, sharply down from 55 in January.

Orders for transportation equipment fell 2.8% after tumbling 14.0% in January. Motor vehicle orders decreased 0.9%.

Unfilled orders at manufacturers slipped 0.1% after being unchanged in January, which does not bode well for factory production. Inventories at factories rebounded 0.2%.

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