Solid Business Spending Plans Brighten Outlook for Factories

Inside The Life Fitness Manufacturing Facility Ahead of Durable Goods Orders
Luke Sharrett/Bloomberg via Getty ImagesA 'Made In The USA' sticker on a box containing Hammer Strength weightlifting equipment at the Life Fitness manufacturing facility in Falmouth, Kentucky.
By Lucia Mutikani

A gauge of U.S. business investment spending plans increased solidly for a second straight month in April, a hopeful sign for manufacturing activity after a long spell of weakness.

The overall economy is gradually firming, with other reports Tuesday showing consumer confidence perking up this month and house prices extending gains in March, which should boost household equity and support consumer spending.

The Commerce Department said non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, rose 1 percent last month after an upwardly revised 1.5 percent increase in March.

The so-called core capital goods orders were previously reported to have increased 0.6 percent in March.

%VIRTUAL-pullquote-It provides some indication that business capital investment activity might be on the mend.%"It provides some indication that business capital investment activity might be on the mend," said Millan Mulraine, deputy chief economist at TD Securities in New York.

Business spending has slackened as a sharp decline in energy prices forced oilfield companies, including Schlumberger (SLM) and Halliburton (HAL), to slash their capital expenditure budgets. Investment has also been undermined by a strong dollar, which has squeezed profits of multinational corporations.

In a separate report, the Conference Board said its index of consumer attitudes rose to 95.4 this month from 94.3 in April.

Consumers' outlook for the labor market improved, with a rise in the share of households anticipating more jobs in the months ahead.

The rebound in business spending, together with a sturdy labor market, a strengthening housing market and firming underlying inflation, should keep the Federal Reserve on course to raise interest rates later this year.

The dollar rallied against a basket of currencies on the upbeat data, while prices for U.S. government debt prices rose. U.S. stocks were trading lower.

Business Spending Rise

The increase in core capital goods orders offers cautious optimism that business spending outside the energy sector will pick up in the coming months and support manufacturing, and the broader economy, after a dismal first quarter.

Although order books at manufacturers remain lean, the core capital goods data corroborates other surveys, including one on small businesses, that showed a jump in capital expenditure plans in April and May.

Economic growth slumped early in the year and data so far on retail sales and manufacturing point to tepid economic activity early in the second quarter. Economists polled by Reuters had forecast core capital goods orders gaining 0.4 percent.

Shipments of core capital goods, which are used to calculate equipment spending in the government's gross domestic product measurement, rose 0.8 percent last month after a 1.0 percent increase in March.

A 2.5 percent drop in transportation equipment, however, weighed down on overall orders for durable goods -- items ranging from toasters to aircraft that are meant to last three years or more -- which fell 0.5 percent last month.

Orders for machinery recorded their biggest gain in eight months in April and the increase in bookings for primary metals was the largest since September. While orders for computers and electronic products fell 3.6 percent, that followed a hefty 7.7 percent surge in March.

Orders for electrical equipment, appliances and components dropped 1.5 percent after gaining 0.9 percent the prior month.

Brightening Housing Picture

In another report the Commerce Department said new home sales increased 6.8 percent to a seasonally adjusted annual rate of 517,000 units. March's sales pace was revised up to 484,000 units from the previously reported 481,000 units.

The upbeat report added to housing starts data in indicating that housing was gaining momentum after treading water for much of last year.

A fourth report showed single-family home prices rose in March from a year earlier. The S&P/Case-Shiller composite index of 20 metropolitan areas increased 5 percent from a year ago, matching February's gain.

Economists believe housing will take the baton from a lethargic manufacturing sector and help to drive economic growth this year. Housing is being buoyed by a strengthening jobs market, which is encouraging young adults to set up their own households.

While higher home prices could reduce affordability, they could encourage more homeowners to put their houses on the market, which could ease supply constraints and boost sales. In addition, higher home values boost household net worth, which is positive for consumer spending.

9 Numbers That'll Tell You How the Economy's Really Doing
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Solid Business Spending Plans Brighten Outlook for Factories
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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