US core capital goods orders solid; business equipment spending a touch cooler

By Lucia Mutikani

WASHINGTON (Reuters) -New orders for key U.S.-manufactured capital goods increased more than expected in September, though business spending on equipment probably slowed marginally in the third quarter.

With the Federal Reserve expected to continue cutting interest rates this year and in 2025, business investment likely remains supported. Reduced uncertainty as the nation moves past the closely contested Nov. 5 presidential election is also seen providing a lift.

The Atlanta Fed pared its gross domestic product estimate for the third quarter to a 3.3% annualized rate from a 3.4% pace The government is scheduled to publish its advance estimate of third-quarter growth next Wednesday. The economy grew at a 3.0% rate in the April-June quarter.

"While monetary policy acts with a lag, the direction of rates is now clearly lower and with the U.S. presidential election soon behind us, businesses may soon walk into a clearer environment more supportive of capex investment," said Shannon Grein, an economist at Wells Fargo.

Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, jumped 0.5% last month after an unrevised 0.3% gain in August, the Commerce Department's Census Bureau said.

Economists polled by Reuters had forecast these so-called core capital goods orders would edge up 0.1%. Core capital goods shipments fell 0.3% after dipping 0.1% in the prior month.

Higher borrowing costs have been a constraint on business investment, though a loosening of financial conditions as the U.S central bank prepared to cut interest rates boosted spending on equipment in the second quarter.

The Fed last month cut its policy rate by a half-percentage point to the 4.75%-5.00% range, having hiked it by 525 basis points in 2022 and 2023 to curb inflation. It is expected to lower borrowing costs by 25 basis points next month.

Stocks on Wall Street traded higher. The dollar was steady against a basket of currencies. U.S. Treasury yields fell.

SENTIMENT TICKS UP

Easing interest rates helped to lift consumer sentiment this month, though anxiety over the upcoming election lingered.

The University of Michigan's consumer sentiment index edged up to a final reading of 70.5 from 68.9 earlier this month and 70.1 in September. There were modest improvements in buying conditions for long-lasting manufactured goods.

The Census Bureau report showed non-defense capital goods orders dropped 4.5% after declining 4.4% in August. Shipments of these goods dropped 3.6% after falling 2.0% in the prior month. These shipments go into the calculation of the business spending on equipment component in the GDP report.

"This is still a good quarter, though, for domestic equipment investment, which we now expect to rise at a 8% rate, down a touch from our prior assumption of a 10% rate," said Abiel Reinhart, an economist at JPMorgan.

"That reflects earlier increases in aircraft shipments, vehicles, as well as computer-related investment."

Orders for durable goods, items ranging from toasters to aircraft meant to last three years or more, decreased 0.8% after falling by the same margin in August. They were pulled down by a 3.1% drop in orders for transportation equipment, which followed a 3.4% decline in August.

Motor vehicles and parts orders rebounded 1.1%. Orders for commercial aircraft and parts tumbled 22.7% after declining 19.7% in the prior month. Boeing reported on its website that it had received 65 aircraft orders, up from 22 in August.

Last month's rise in unadjusted aircraft orders was probably less than what had been anticipated by the model used by the government to strip out seasonal fluctuations from the data. That resulted in the negative adjusted orders number.

The outlook for aircraft orders remains bleak as Boeing is reeling from a host of problems, including a six-week strike by factory workers on the West Coast, which has halted production of its best-selling 737 MAX as well as 767 and 777 wide-body planes. The striking workers on Wednesday rejected a contract offer. Boeing also reported a surge in quarterly losses.

Excluding transportation, orders rose 0.4%, building on the 0.6% gain in August. There were increases in orders of primary metals and fabricated metal products.

But orders for machinery fell 0.2%. Orders for computers and electronic products slipped 0.3%, while bookings for electrical equipment, appliances and components were unchanged.

"Recessions typically display large double-digit declines in both durable goods orders and orders for capital goods and this is not occurring so in a sense the message ... is arguably a constructive one for the economy as a whole," said Conrad DeQuadros, senior economic advisor at Brean Capital.

(Reporting by Lucia Mutikani; Editing by Paul Simao and Andrea Ricci)