A slump in June orders for equipment such as computers and machinery signals U.S. business investment will probably cool in the second half of the year and contribute less to the economic expansion.
Bookings for non-defense capital goods excluding aircraft, a proxy for future corporate spending, dropped 1.4 percent, the third decrease in the past four months, according to Commerce Department data issued today in Washington. Another report showed claims for unemployment benefits declined more than forecast last week, which may have resulted from difficulty adjusting data for seasonal shutdowns of auto factories.
Softening overseas demand, slowing U.S. consumer spending and gridlock in Washington over fiscal policy may prompt businesses to put off replacing old equipment, hurting profits at companies like Xerox Corp. (XRX:US) A report tomorrow is projected to show the world’s largest economy expanded in the second quarter at the weakest pace in a year.
“Business investment has definitely shifted lower,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC in New York. The European debt crisis and fiscal cliff “will put downward pressure on orders, which will translate into weaker growth in the U.S.”
Stocks jumped today as European Central Bank President Mario Draghi said the central bank will do whatever it takes to preserve the euro. The Standard & Poor’s 500 Index climbed 1.7 percent to 1,360.02 at the 4 p.m. close in New York. Treasury securities fell, sending the yield on the benchmark 10-year note up to 1.43 percent from 1.40 percent late yesterday.
Draghi’s statement at the Global Investment Conference in London today suggested the ECB may intervene in bond markets after a surge in yields of Spanish and Italian securities threatened the existence of the 17-nation currency union.
The U.S. Commerce Department’s report showed total orders for durable goods, those meant to last at least three years, climbed 1.6 percent for a second month, exceeding the median forecast of economists surveyed by Bloomberg News that called for a 0.3 percent gain. The increase was paced by bookings for civilian aircraft and military hardware that are often volatile.
Orders excluding the volatile transportation category unexpectedly dropped 1.1 percent in June, the most in five months. Demand for computers and communications equipment slumped 4.9 percent last month, while orders for machinery decreased 1.1 percent.
Bookings for non-military capital goods excluding aircraft fell at a 3.1 percent annual rate in the second quarter, the first decrease since the same period in 2009, when the U.S. was still in a recession.
“Global activity has shifted lower,” said Porcelli, who correctly projected the gain in total orders. “It is difficult for demand to gather much momentum at this stage.”
The report contained better news for estimates of business investment last quarter. Shipments of non-military capital goods excluding aircraft, used in calculating gross domestic product, increased 1.2 percent in June after rising 1.1 percent the prior month.
“The strength in underlying shipments bodes well for business investment in Q2, although the weakness of orders suggests that firms have become more uncertain about the outlook for demand,” Peter Newland, an economist at Barclays Capital in New York, said in a note to clients.
Xerox, the Norwalk, Connecticut-based provider of printers and business services, cut its full-year profit forecast as the economic slump in Europe crimped demand for technology.
“The economic uncertainty has created more pressure especially in Europe and especially in our technology business,” Ursula Burns, chief executive officer, said on a July 20 conference call with analysts.
The economy grew at a 1.4 percent annual rate, down from a 1.9 percent rate in the first quarter, economists forecast a Commerce Department report tomorrow will show, according to the median estimate in a Bloomberg survey. Consumer spending probably rose at a 1.3 percent pace following a 2.5 percent gain in the first three months of the year.
First-time applications for jobless benefits fell 35,000 in the period ended July 21 to 353,000, the Labor Department said. Economists forecast 380,000 claims, according to the median estimate in a Bloomberg survey.
The report extended a period of volatility typically seen in July. Changes in the annual auto plant shutdowns that occur this time of year have made it difficult to adjust the data for seasonal variations, the Labor Department has said.
Statistical noise aside, slowing economies in Europe and China, which have reduced global demand for goods, may continue to curb employment. The U.S. presidential election and a looming battle over tax cuts and government spending may also be making businesses reluctant to hire.
“All in all, the labor market is gradually healing,” said Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. “We’ve got to take this report with a grain of salt. The jobs market is still tough and we’re setting ourselves up for a soft second half of the year.”
Other reports today showed consumer sentiment fell last week and Americans signed fewer contracts last month to buy previously owned homes.
The Bloomberg Consumer Comfort Index fell to minus 38.5 in the week ended July 22, the lowest level in two months, from minus 37.9 in the previous period. An index of the buying climate, one of the three components of the index, fell to minus 44.7, its lowest reading since May.
“Household opinion on the state of the American economy remains mired in a deep funk that does not bode well for the spending outlook for the remainder of the year,” said Joseph Brusuelas, a senior economist at Bloomberg LP in New York. “A further deterioration in the BCCI buying index suggests a soft labor market and tepid income gains point to a further loss of momentum in the household sector early in the third quarter.”
The index of pending purchases of existing homes decreased 1.4 percent in June to 99.3 after a revised 5.4 percent gain in May that was less than initially reported, figures from the National Association of Realtors showed.
A lack of inventory may be hurting the market even as record-low mortgage rates make buying a home more affordable.
“We’ve been seeing a steady decline in the level of housing inventory, which is most pronounced in the lower price ranges popular with first-time buyers and investors,” Lawrence Yun, the Realtors chief economist, said in a statement.
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