U.S. Capital-Equipment Orders Rise in Sign Demand Resilient

(Bloomberg) -- Orders placed with U.S. factories for business equipment rebounded in April even as the prior month’s figure was revised downward, indicating resilient demand at the start of the second quarter, Commerce Department figures showed Friday.

Highlights of Durable Goods (April)

  • Non-military capital goods orders excluding aircraft rose 1% m/m (est. 0.7% gain) after falling 0.9% the prior month (revised from 0.4% drop); figure is proxy for business investment
  • Shipments of those goods, used to calculate gross domestic product, rose 0.8% (est. 0.4% increase) after a revised 0.7% decrease (prev. 0.8% drop)
  • Bookings for all durable goods, or items meant to last at least three years, fell 1.7% (est. 1.3% drop) following 2.7% increase 

Key Takeaways

Outside of declines in machinery and civilian aircraft, the gain in orders was fairly broad-based, spanning computers, electrical equipment and metals. While the figures are typically volatile, the latest report indicates business spending continues to expand at a healthy pace.

Business investment, joining consumer spending, may help support a projected rebound in economic growth this quarter as demand gets a boost from lower taxes for companies and individuals. At the same time, rising input costs, along with President Donald Trump’s tariffs on imported metals and threats of other levies, pose risks for corporations’ investment plans.

U.S. Capital-Equipment Orders Rise in Sign Demand Resilient

Aircraft orders weighed on total bookings: Boeing Co., the Chicago-based aerospace company, said it got 78 orders for aircraft in April, down from 197 the prior month. Friday’s government report showed that orders for civilian aircraft and parts fell 29 percent in April after surging 60.7 percent in March.

According to GDP figures released in April, spending on business equipment rose at a 4.7 percent annualized pace in the first quarter, after surging 11.6 percent in the previous three months. It accounted for 5.8 percent of nominal GDP.

Economists’ Views

Reaction to the data was somewhat mixed. JPMorgan Chase & Co. economist Daniel Silver wrote that the key capital-goods orders and shipments figures “appear to be continuing to trend higher over time,” though inflation-adjusted equipment spending may be “pretty soft” during the second quarter. Jim O’Sullivan at High Frequency Economics said in a note that the “trends still look solidly upward.”

Meanwhile, Stephen Stanley at Amherst Pierpont Securities wrote that core capital-goods shipments so far this year are “far softer than I would have imagined” given the corporate tax cuts, though he continues to expect a “strong year for capital spending.”

What Our Economists Say

April’s durable goods orders suggest a plateau may be approaching. Headline orders were distorted by a pullback in aircraft orders, but the underlying details confirm a pattern also evident in the industrial production data and recent ISM surveys -- the pace of activity appears to be leveling out. By no means does this imply that a downturn is coming; rather, like the guidance given by a major U.S. manufacturer in a recent quarterly earnings call, the current state of factory sector conditions may be as good as it gets in the present economic cycle.

-- Carl Riccadonna and Niraj Shah, Bloomberg Economics

Read more for the full reaction note from Bloomberg Economics.

Other Details

  • Excluding transportation-equipment demand, which is volatile, durable-goods orders rose 0.9 percent (median estimate 0.5 percent gain) after upwardly revised 0.4 percent gain
  • Orders for machinery fell 0.8 percent following a 3.2 percent drop
  • Motor vehicles and parts orders were up 1.8 percent; electrical equipment, appliances and parts advanced 2.6 percent
  • Fabricated-metal product orders rose 2 percent, primary metals up 1.3 percent
  • Durable goods inventories rose 0.3 percent
  • Defense capital-goods orders increased 3.1 percent following 21.2 percent plunge

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