U.S. factory orders tumble, but business spending solid

Investment in equipment rises 8.8% in quarter

WASHINGTON • New orders for U.S.-made goods recorded their biggest drop in nearly three years in July, but demand for capital goods was stronger than previously reported, pointing to a faster pace of business spending early in the third quarter.

Strong business spending is underpinning manufacturing and helping offset the drag from declining motor vehicle output. Manufacturing makes up about 12 per cent of the U.S. economy.

Factory goods orders tumbled 3.3 per cent amid a slump in demand for transportation equipment, the Commerce Department said on Tuesday. That was the biggest drop since August, 2014, and followed a 3.2-percent surge in June.

Orders excluding transportation equipment rose 0.5 per cent after edging up 0.1 per cent the prior month. Orders for non-defence capital goods excluding aircraft, seen as a measure of business spending plans, jumped 1.0 per cent in July instead of gaining 0.4 per cent as reported last month.

Orders for these so-called core capital goods slipped 0.1 per cent in June. Shipments of core capital goods, which are used to calculate business equipment spending in the gross domestic product report, jumped 1.2 per cent in July instead of the previously reported 1.0-per-cent rise.

The surge in shipments suggests that business spending on equipment strengthened further early in the third quarter.

“The recovery in business equipment investment that began late last year appears to have continued into the second half of 2017,” said John Ryding, chief economist at RDQ Economics in New York.

Business investment on equipment increased at an 8.8-per-cent annualized rate in the April-June quarter, the fastest pace since the third quarter of 2015. Business spending is firming even as the boost from oil and gas drilling is starting to fade as ample supplies restrain crude oil prices.

In July, orders for computers and electronic products increased 2.1 per cent, the biggest gain in a year. Orders for electrical equipment, appliances and components vaulted 2.6 per cent, also the largest increase in a year.

Machinery orders, however, fell 0.9 per cent. That was the largest drop in nine months and followed a 0.5-per-cent gain in June. Orders for industrial machinery fell 0.8 per cent.

Mining, oilfield and gas field machinery orders rose 1.7 per cent after climbing 2.5 per cent in June. Demand is slowing as oil prices have dipped below US$50 per barrel, and oil rigs in operation are hovering near a two-month low.

Orders for transportation equipment sagged 19.2 per cent, the biggest drop since August, 2014. That reflected a 70.8-per-cent dive in civilian aircraft orders. Boeing has reported on its website that it received only 22 aircraft orders in July, sharply down from 184 in the prior month.

Motor vehicle orders fell 0.9 per cent after being unchanged in June. Auto sales peaked last December, leading to a slump in motor vehicle production as manufacturers work to reduce an inventory overhang.

Production could get a boost from an anticipated spike in demand for automobiles as residents in storm-ravaged Texas replace flood-damaged vehicles.

In July, unfilled orders at factories fell 0.3 per cent after increasing 1.3 per cent in June. Manufacturing inventories gained 0.2 per cent, rising for the second-straight month.

Shipments rose 0.3 per cent. As a result, the inventories-to-shipments ratio fell to 1.37 from 1.38 in June.

“This is consistent with our expectation for inventories to be additive to growth in the second half,” said Tim Quinlan, a senior economist at Wells Fargo Securities in Charlotte, N.C.

“The fact that the inventory-to-shipment ratio came down suggests the stockpiling is justified.”

TY WRIGHT / BLOOMBERG While U.S. factory orders fell overall, a surge in equipment shipments suggests that business spending strengthened early in the third quarter.