US core capital goods orders post largest gain in nearly 6 years in March

* Core capital goods orders increase 3.3% in March

* Shipments of core capital goods rise 1.2%

* Goods trade deficit widens 5.3% to $87.9 billion

* Single-family housing starts jump 9.7%, but permits fall 3.8%

By Lucia Mutikani

WASHINGTON, April 29 (Reuters) - New orders for key U.S.-manufactured capital goods increased by the most in nearly six years in March while shipments of those products rose solidly, suggesting that business spending on equipment helped drive economic growth in the first quarter.

While other data from the Commerce Department on Wednesday showed a sharp widening in the goods trade deficit last month amid strong import growth, the anticipated drag on gross domestic product from the large trade gap was likely blunted by a strong increase in inventories at businesses.

The Commerce Department is due to publish its advance estimate of first-quarter GDP on Thursday. Business spending on equipment is being fueled by an artificial intelligence investment boom as well as the construction of data centers to drive the technology, helping to prop up manufacturing. There are, however, concerns that the U.S.-Israeli war with Iran, which has raised the prices of oil and other commodities, could make businesses more cautious about new capital investments. The strength in business spending, though some of it reflected in higher prices, cemented expectations that the Federal Reserve would keep its benchmark overnight interest rate in the 3.50%-3.75% range on Wednesday and probably leave it there for some time.

"Business equipment investment will likely be a substantial boost to first-quarter GDP growth tomorrow," said Veronica Clark, an economist at Citigroup. "But notably, strong nominal durable goods orders may also increasingly reflect higher prices for these goods, suggesting real domestic activity is not necessarily as strong."

Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, jumped 3.3% last month, the Commerce Department's Census Bureau said. That was the largest rise since June 2020 and followed an upwardly revised 1.6% increase in February.

Economists polled by Reuters had forecast these so-called core capital goods orders gaining 0.5% after a previously reported 0.7% advance in February. Orders for computers and electronic products shot up 3.7%, reflecting strong demand for communications equipment.

There were solid gains in orders for machinery as well as electrical equipment, appliances and components. Shipments of core capital goods advanced 1.2% after rising 1.3% in February.

These shipments are among the components that go into the calculation of the business spending on equipment component in the GDP report. Economists expected that business investment in equipment helped to offset an anticipated further slowdown in consumer spending in the first quarter.

Orders for durable goods, items ranging from toasters to aircraft meant to last three years or more, rebounded 0.8% in March after dropping 1.2% in February. They were lifted by a 0.8% increase in orders for transportation equipment.

U.S. stocks opened mixed. The dollar advanced against a basket of currencies. U.S. Treasury yields rose.

GOODS TRADE DEFICIT WIDENS In a separate report, the Census Bureau said that the goods trade deficit increased 5.3% to $87.9 billion in March. It totaled $83.5 billion in February. The Census Bureau has resumed publication of the so-called advance indicators report, which includes the goods trade deficit and wholesale and retail inventories, having suspended the releases following last year's government shutdown. It is mostly caught up on key data releases after delays caused by the shutdown.

Imports of goods increased $9.6 billion to $299.3 billion, reflecting an 11.0% surge in motor vehicles. There were also solid increases in imports of food, consumer and capital goods as well as industrial supplies.

Some of the imports ended up as inventory at warehouses. Wholesale inventories increased 1.4%, while stocks at retailers climbed 0.7%. That could limit the anticipated drag on GDP growth from the wider goods trade deficit. Goods exports increased $5.2 billion to $211.5 billion in March amid rises in shipments of food, motor vehicles, capital goods and industrial supplies, which include petroleum. But exports of consumer goods dropped 7.5%. Economists expected the Middle East conflict to boost goods exports in the months ahead. The U.S. is a net oil exporter.

A Reuters survey of economists is forecasting that GDP increased at a 2.3% annualized rate last quarter. Economic growth nearly stalled in the fourth quarter, with GDP rising at only a 0.5% pace. The solid increase in core capital goods shipments last month as well as wholesale and retail inventories could prompt economists to upgrade their GDP growth estimates.

A third report from the Census Bureau showed single-family homebuilding increased to a 13-month high in March, but the improvement was likely a blip as permits for future construction fell sharply and confidence among builders remained subdued.

Single-family housing starts, which account for the bulk of homebuilding, surged 9.7% to a seasonally adjusted annual rate of 1.032 million units, the highest level since February 2025. They rose 8.9% year on year in March. Permits for future construction of single-family homes decreased 3.8% last month to a rate of 895,000 units. They dropped 7.9% year-on-year in March. Homebuilding was already under pressure from tariffs on imported goods, including lumber and vanity cabinets, before the war abruptly halted a downward trend in mortgage rates.

A National Association of Home Builders survey this month showed homebuilder confidence deteriorated in April, with builders reporting that suppliers had increased building material costs due to higher fuel prices, including gasoline and diesel. NAHB estimated that energy costs made up roughly 4% of residential construction material input and service costs.

Starts for housing projects with 5 units or more, a very volatile segment, increased 9.6% to a rate of 446,000 units in March. Overall housing starts vaulted 10.8% to a pace of 1.502 million units. They increased 10.8% year-on-year in March.

Building permits for multifamily housing projects tumbled 23.5% to a rate of 427,000 units in March. Overall building permits declined 10.8% to a rate of 1.372 million units last month. They dropped 7.4% year-on-year in March.

Economists believe residential investment, which includes homebuilding, contracted for a fifth straight quarter in the January-March period. (Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Mark Porter)