Business | Economy

Sponsored By

US capital goods orders decline

Orders for US capital goods fall by most since November

  • Bloomberg
  • Published: 18:46 August 24, 2012
  • Gulf News

Washington: Demand for US capital goods such as machinery and communications gear dropped in July by the most in eight months, indicating companies are pulling back on investment.

Bookings for non-military capital equipment excluding planes slumped 3.4 per cent, a Commerce Department report showed today in Washington. Total orders for goods meant to last at least three years jumped 4.2 per cent, paced by a 54 per cent surge in demand for civilian aircraft.

Possible US tax increases and spending cuts and a global economic slowdown are hurting companies such as Caterpillar Inc and Deere & Co., indicating manufacturing will no longer be a driver of the expansion. Federal Reserve policy makers have signalled they are prepared to take further steps to sustain the expansion if growth doesn’t pick up.

“There’s uncertainty domestically about the tax environment, and there’s uncertainty globally about the outcome of the European crisis,” said Millan Mulraine, a senior US strategist at TD Securities in New York, who correctly projected the overall gain in orders. This is “not engendering business investment and hiring,” he said. “This would bolster the case for the Fed, suggesting that the soft underbelly of the recovery may be extending into the third quarter.”

Stock-index futures added to earlier losses after the report. The contract on the Standard & Poor’s 500 Index maturing in September dropped 0.3 per cent to 1,396 at 8:47am in New York. Treasury securities rose, sending the yield on the benchmark 10-year note down to 1.63 per cent from 1.68 per cent late yesterday.

The median forecast of 75 economists surveyed by Bloomberg called for a 2.5 per cent gain in total orders. Estimates ranged from a decline of 2.5 per cent to a 7 per cent increase.

Bookings for non-defence capital goods excluding aircraft are considered a proxy for future business investment in items such as computers, engines and communications gear.

Last month’s drop reflected a 3.6 per cent decrease in demand for machinery and a 4 per cent slump in communications equipment. Figures for the prior month were also revised down to show a 2.7 per cent decline for June, which was previously estimated as a 1.7 per cent fall.

Shipments of those capital goods, used in calculating gross domestic product, were unchanged in July after rising 1.5 per cent the prior month.

Last month’s decrease in capital goods orders extends a pattern of declines early in a quarter that are sometimes reversed later. Demand has dropped in the first month of a quarter in all but two instances since the beginning of 2009.

Civilian aircraft bookings surged in July after rising 33 per cent gain the prior month. Boeing Co., the largest US aircraft maker, said it received 260 orders last month, up from 24 in June.

Regional reports indicate a slowdown for factories in August. Manufacturing in the Philadelphia region shrank for the fourth consecutive month, while New York-area factories unexpectedly contracted for the first time in 10 months.

The lingering domestic fiscal policy debate could be holding back orders for companies like Caterpillar as businesses await the end-of-year “fiscal cliff” deadline.

“One of the drags that we see right now, and we hear this actually from the field, is that uncertainty around the tax increases at the end of the year,” Michael DeWalt, director of investor relations at the Peoria, Illinois-based construction manufacturer, said at an August 8 conference. The government spending cuts at the end of the year are also “making everybody nervous and are probably delaying purchases,” he said.

The global slump is also a headwind. Deere cut its full- year profit forecast August 15 as sales slow in Asia and Latin America, undermining the growth strategy at the world’s largest manufacturer of agricultural equipment.

Boeing has been influenced. The Chicago-based plane maker this week lost an order for 35 Dreamliners with a list price of $8.5 billion in the biggest 787 cancellation yet as Australia’s Qantas Airways Ltd scrapped a contract after deliveries were delayed and demand cooled. Cathay Pacific Airways Ltd and Singapore Airlines Ltd are among foreign carriers that have also pulled back as international travel has slowed.

The auto industry has been one of the economy’s few bright spots, even as vehicle purchases declined in July from the prior month. The industry bolstered the US economy with first-half sales up 15 per cent, setting a pace for more than 14 million annual sales and the best year since 2007.

Friday’s data showed orders for motor vehicles and parts climbed 13 per cent in July, today’s report showed.

The Federal Reserve signalled this week that it’s ready to take additional steps to spur the recovery. Many policy makers said additional stimulus probably will be needed soon unless the economy shows signs of a durable pickup, according to minutes of the central bank’s most recent meeting.

“Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery,” according to the record of the Federal Open Market Committee’s July 31- August 1 gathering.

Gulf News
Retail Gold Rate
Business Editor's choice