US core capital goods orders rebound; inflation muted

WASHINGTON — New orders for key USmade capital goods rose by the most in six months in January and shipments increased, but the trend in both measures of business spending on equipment remained soft, leaving forecasts for weak first-quarter economic growth intact.

The slowing economy is helping keep inflation tame, with other data on Wednesday showing producer prices barely rising in February, resulting in the smallest annual increase in more than 1-1/2 years. This environment supports the Federal Reserve’s wait-and-see approach to further interest rate hikes this year.

“There is still a strong case for the Fed to remain patient,” said Michael Pearce, a senior US economist at Capital Economics in New York. “The rebound in underlying capital goods orders is still consistent with a slowdown in business equipment investment growth, and producer price figures show few signs of a pick-up in inflation in the pipeline.”

Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, rebounded 0.8%, the biggest gain since July. These so-called core capital goods orders fell 0.9% in December.

Economists polled by Reuters had forecast core capital goods orders edging up 0.1% in January. Core capital goods orders increased 3.1% on a year-on-year basis.

Core capital goods orders in January were boosted by orders for machinery, which rebounded 1.4% after dropping 0.6 percent in December. Orders for electrical equipment, appliances and components jumped 1.7% after falling 0.2% in the prior month.

But orders for computers and electronic products declined 1.3%, the biggest drop since March 2017. There were also decreases in orders for primary metals while orders for fabricated metal products were unchanged.

Shipments of core capital goods jumped 0.8% in January after edging up 0.1% in the prior month. Core capital goods shipments are used to calculate equipment spending in the government’s gross domestic product measurement.

The January report was delayed by a 35day partial shutdown of the federal government that ended on Jan. 25. The February report, which was scheduled for release this month, will now be published on April 2.

LOW GROWTH ESTIMATES

The strong core capital goods shipments in January prompted some economists to raise slightly their estimates for first-quarter business equipment spending. Investment in equipment by businesses accelerated in the fourth quarter of last year after slowing in the July-September period.

The first-quarter GDP growth forecast also got another small lift from a second report from the Commerce Department on Wednesday showing construction outlays jumped 1.3% in January as investment in public projects hit a more than eight-year high. Construction spending had dropped for two straight months.

The Atlanta Fed bumped up its growth estimate for the January-March quarter by two-tenths of a percentage point to a 0.4% annualized rate. The economy grew at a 2.6% pace in the fourth quarter of 2018 after expanding at a brisk 3.4% rate in the JulySeptember period.

The dollar was trading lower against a basket of currencies. US Treasury prices fell, and stocks on Wall Street rose.

The economy is losing steam as the stimulus from a $1.5 trillion tax cut fades. A trade war between the United States and China, slowing global economies and uncertainty over Britain’s exit from the European Union are other factors hurting activity.

The ebb in activity is helping keep price pressures under wraps. A third report from the Labor Department on Wednesday showed its producer price index for final demand edged up 0.1% in February, lifted by a rebound in the cost of gasoline. The PPI had dropped for three straight months.

In the 12 months through February, the PPI rose 1.9%. That was the smallest gain since June 2017 and followed a 2.0% increase in January. Economists polled by Reuters had forecast the PPI rebounding 0.2% in February and advancing 1.9% on a year-on-year basis. —