WASHINGTON, March 24 (Reuters) – New orders for key U.S.-made capital goods rose unexpectedly in February, but last month’s data was revised up sharply, suggesting that business spending on equipment may struggle to rebound in the first quarter.
While a survey from S&P Global on Friday showed business activity gaining steam in March, manufacturing contracted for the fifth straight month. The reports tend to confirm that manufacturing is in recession, weighed down by higher borrowing costs. With financial conditions tightening after the recent failure of two regional banks, the outlook for business investment and manufacturing is cloudy.
“We expect more gloomy times ahead as spending softens, lending standards tighten and higher interest rates than in the post-global financial crisis era make it expensive to buy capital use and financial investment,” said Oren Klachkin, leading US economist at Oxford Economics in New York. “The recent spate of stress in the banking sector will only add to future strains.”
Orders for non-defense capital goods other than aircraft, a closely watched proxy for business spending plans, rose 0.2% last month, the Commerce Department said. Data for January was revised lower to show these so-called core capital goods orders rose 0.3% instead of 0.8% as previously reported.
Economists polled by Reuters predicted that orders for core capital goods would be unchanged. Core capital goods orders rose 4.3% on a year-over-year basis in February. The data is not adjusted for inflation. Producer prices for finished products, excluding food, exceeded monthly profits on core capital goods orders.
That means inflation-adjusted orders are weak. The report is consistent with Federal Reserve bank factory surveys that show business sentiment remains depressed so far this year.
That was reinforced by the S&P Global survey which showed that the flash manufacturing PMI rose to a subdued 49.3 in March from 47.3 in February. Manufacturing, which accounts for 11.3% of the US economy, contracted for two consecutive quarters as higher interest rates dampened demand for goods, which are mostly bought on credit.
Spending is also shifting from goods to services, while the past appreciation of the dollar and slow global growth are holding back exports. The inventory cycle has also returned, with businesses restocking slowly.
There are expectations that the tightening of lending standards by banks following the recent turmoil in financial markets may make credit unavailable 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 halting further increases in borrowing costs, in a nod to capital- os in financial markets.
Wall Street stocks fell on renewed fears of a crash in the banking sector. The dollar rose against a basket of currencies. US Treasury prices are higher.
BLOW IN INVESTMENT
“While the extent of the drag from the events of the past two weeks remains to be seen, it would be surprising if this did not provide an additional burst of investment, particularly for smaller companies that are increasingly dependent on bank financing,” said Andrew. Hunter, deputy chief US economist at Capital Economics.
Last month, there was an increase in orders for electrical equipment, appliances and components, metal products as well as primary metals. But orders for computers and electronic products fell and machinery fell.
Shipments of core capital goods were unchanged after rising 0.9% in January. Shipments of core capital goods are used to calculate expenditure on equipment to measure gross domestic product. Shipments of nondefense capital goods, which also go into the GDP calculation, fell 0.6% after falling 1.7% in January.
Economists at Goldman Sachs cut their first quarter GDP growth estimate to a 2.4% annualized rate from a 2.6% pace. Business spending on equipment contracted in the fourth quarter, helping to hold back GDP growth at a 2.7% rate. The economy grew at a 3.2% pace in the third quarter.
“The manufacturing sector is in recession and will be a drag on the broader economy,” said Conrad DeQuadros, senior economic adviser at Brean Capital in New York. “Business equipment spending may contract in real terms in first quarter GDP report.”
Orders for items from toasters to airplanes that are intended to last three years or more fell 1.0% in February. These so-called durable goods orders decreased by 5.0% in January.
Durable goods orders last month were dragged down by a 6.6% decline in the volatile civil aircraft category, which followed a 56.3% drop in January. Boeing ( BA.N ) reported on its website that it received just five aircraft orders in February, down from 55 in January.
Orders for transportation equipment fell 2.8% after falling 14.0% in January. Motor vehicle orders fell 0.9%.
Unfilled orders by manufacturers fell 0.1% after being unchanged in January, which did not bode well for factory production. Inventories of factories returned 0.2%.
“While inventories are rising, the number of containers at US ports is declining, suggesting that cargoes may weaken further in the coming months,” said Erik Johnson, a senior economist at BMO Capital. Markets in Toronto.
Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci
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