New orders for key U.S.-manufactured capital goods showed a stronger-than-expected rebound in April, signaling a potential moderate improvement in business spending on equipment early in the second quarter. However, business investment remains constrained by higher borrowing costs, a strong dollar, and weak global demand, which continue to weigh on the manufacturing sector.
Economic Indicators and Market Reaction
The Commerce Department reported that non-defense capital goods orders excluding aircraft, a crucial indicator of business spending plans, rose 0.3% in April, following an upwardly revised 0.1% decline in March. This exceeded economists’ expectations of a modest 0.1% increase. Despite these gains, the manufacturing sector, which accounts for 10.4% of the economy, remains under pressure.
Sal Guatieri, a senior economist at BMO Capital Markets, commented, “Despite elevated borrowing costs and stricter loan standards, U.S. business investment could pick up in the second quarter. However, the manufacturing sector as a whole is expected to remain in low gear until interest rates ease, the greenback weakens, and the global economy strengthens.”
Core capital goods orders saw a 1.2% year-on-year increase in April. Shipments of these goods, which contribute to the GDP calculation, rose 0.4% after a 0.3% decline in March. This improvement, although partly driven by higher prices, contributed to Goldman Sachs raising its second-quarter GDP growth estimate to 3.2% from 3.1%.
Market Implications
Stocks on Wall Street reacted positively, with indices trading higher. The dollar fell against a basket of currencies, while the prices of longer-dated U.S. Treasuries rose. Despite these gains, the Federal Reserve’s policy tightening, which has raised interest rates by 525 basis points since March 2022, continues to dampen investment by increasing financing costs.
The Federal Reserve is expected to begin lowering borrowing costs in September, with its benchmark interest rate currently in the 5.25%-5.50% range. This expectation was bolstered by a University of Michigan survey showing improved consumer inflation expectations in late May.
Consumer Sentiment
The survey revealed that the 12-month inflation expectation fell to 3.3% from 3.5%, and the five-year outlook improved to 3.0% from 3.1%. However, consumer sentiment dropped to a five-month low due to concerns about high borrowing costs. Despite this pessimism, the link between consumer sentiment and spending has been weak.
Durable Goods Orders
The Commerce Department report also highlighted a 0.7% rise in durable goods orders in April, following a revised 0.8% gain in March. Transportation equipment orders increased by 1.2%, with motor vehicles and parts orders up 1.5%. However, commercial aircraft orders fell by 8.0%, reflecting a sharp decline in Boeing’s orders.
Orders for computers, electronic products, electrical equipment, appliances, and components all rose in April. Shipments of durable goods increased by 1.2%, with inventories and unfilled orders also seeing modest gains.
Rubeela Farooqi, chief U.S. economist at High Frequency Economics, noted, “While growth remains positive for now, uncertainty about the rate path may weigh on orders going forward. However, a push from fiscal spending could positively impact orders and investment over time.”
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