US businesses increase spending on capital goods

U.S. companies invested last month in computers, communications equipment and machinery, boosting capital goods orders for the third time in four months.

The 4.1 percent increase to capital goods in August signaled a rebound in business spending after orders fell 5.3 percent in July. It also suggests manufacturing, which has helped drive economic growth since the recession ended in June 2009, is still a bright spot in a weak recovery.

The gains in capital goods orders, along with a jump in business confidence in Germany, helped send stocks soaring. The Dow Jones industrial average surged more than 180 points in afternoon trading.

The overall demand for durable goods fell 1.3 percent in August, the Commerce Department said Friday. But that was pulled down by a significant drop in orders for aircraft. When excluding the volatile transportation sector, orders rose 2 percent — the best showing in five months.

In a separate report, Commerce said that sales of new homes were unchanged from a month earlier at a seasonally adjusted annual sales pace of 288,000. The sales pace was the second-worst on records dating back to 1963, with the pace in May being the worst.

Homes sales in August were down 29 percent from the same month a year earlier.

Normally the building industry powers economic recoveries. Each new home built creates, on average, the equivalent of three jobs for a year and generates about $90,000 in taxes, according to the National Association of Home Builders.

But housing has been at the center of this downturn and shows no signs of recovering quickly.

The manufacturing sector has expanded for 13 straight months, as measured by the Institute for Supply Management.

Capital goods, which excludes transportation and defense goods, are seen as a good proxy for business and economists watch it closely.

Business spending on equipment and software has been growing at a 20 percent annual rate over the past three quarters.

Economists had worried that July’s decline in spending on capital goods was a sign that the sector was losing strength. August’s figures suggest manufacturing activity is growing, but economists remain concerned about its sustainability.

“Though downshifting a tad, business capital spending remains one of the few consistent bright spots on the economic landscape,” said Sal Guatieri, senior economist at BMO Capital Markets.

High-tech firms have been among the companies benefiting from the gains. Cisco Systems Inc. in August reported a 79 percent increase in earnings in the latest quarter as its customers caught up on delayed purchases of networking gear.

Oracle Corp., the world’s biggest maker of database software, last week said it had a 20 percent increase in net income in the latest quarter, which it attributed to increased purchases of its products by corporations.

“Businesses are investing solidly and that tells me the recovery is well entrenched even though most people still believe we are in a recession,” said Joel Naroff, chief economist at Naroff Economic Advisors.

The Commerce report said that orders for machinery rose 3.9 percent in August after tumbling 9.6 percent in July. Demand for computers and related products was up 12 percent. Orders for communications equipment rose 9.2 percent last month. Orders for primary metals rose 2.4 percent.

Durable goods are items expected to last at least three years, such as refrigerators, automobiles and washing machines.

The overall decline in August was the largest since a 2.6 percent decrease in August 2009 and the third overall decline in four months.

Demand for transportation goods fell 10.3 percent last month, after having been up 11.6 percent in July. The swing reflected a 40.2 percent plunge in orders for commercial airplanes, a volatile category which had surged 69 percent in July. Boeing Co. saw its orders climb to 103 planes in July and then drop to just seven planes in August.

Orders for motor vehicles and parts fell 4.4 percent in August after a 4.6 percent increase in July.

Source: AP

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