Orders for U.S. Capital Goods Fall as Spending Cools
Oct. 27 (Bloomberg) -- Orders for U.S. non-military capital equipment excluding airplanes dropped in September, indicating gains in business investment will cool.
Bookings for such goods, including computers and machinery meant to last at least three years, fell 0.6 percent after a 4.8 percent gain in August that was smaller than previously estimated, figures from Commerce Department showed today in Washington. Total orders climbed 3.3 percent last month, led by a doubling in aircraft demand.
The report raises the risk that business investment, which contributed to the rebound from the worst recession since the 1930s, will decelerate in coming months, underscoring Federal Reserve Chairman Ben S. Bernanke's concern that growth is too slow. Combined with a lack of jobs and less need to rebuild inventories, the data point to a slowdown in manufacturing.
"We're looking at weakness in capital spending for at least the next couple of quarters," said Tom Porcelli, senior economist at RBC Capital Markets Corp. in New York, who had predicted a drop in non-military capital goods orders excluding aircraft. "Companies are unwilling to deploy the enormous amount of cash they have as there's skepticism about the economic backdrop. We continue to exist in a slow-growth environment."
U.S. companies are holding almost $1 trillion of cash, an amount Moody's Investors Service says shows borrowers are still concerned about the recovery.
Stocks Decline
Stocks fell after the report, with the Standard & Poor's 500 Index declining 0.5 percent to 1,179.99 at 9:50 a.m. in New York. Treasury securities also dropped, sending the yield on the benchmark 10-year note up to 2.69 percent from 2.64 percent late yesterday.
Total orders were projected to rise 2 percent, according to the median forecast of 76 economists in the Bloomberg survey. Estimates ranged from no change to an increase of 8 percent.
Orders for non-defense capital goods excluding aircraft are considered a proxy for future business investment. Shipments of those items, used in calculating gross domestic product, increased 0.4 percent after rising 1.3 percent in August, less than the 1.7 percent gain estimated previously.
Over the past three months, shipments of capital goods climbed at a 9 percent annual pace, down from a 17 jump in the three months through June and indicating business investment cooled last quarter.
Risk to Growth
Orders for those products increased at a 5.5 percent pace last quarter compared with a 31 percent jump from April through June, pointing to further deceleration in coming months.
The figures may prompt economists to lower forecasts for third-quarter business investment. The world's largest economy grew at a 2 percent annual pace from July through September after expanding at a 1.7 percent pace in the second quarter, according to the median estimate of economists surveyed by Bloomberg. The figures are due in two days.
"Growth of business investment in equipment and software in the third quarter may have slowed by more than we previously thought," Paul Dales, a U.S. economist at Capital Economics Ltd. in Toronto, said in an e-mail to clients. "That suggests the risks to our third-quarter GDP forecast of 3 percent are now on the downside."
'Slow Recovery'
"Many of our U.S. markets remained weak as a result of the slow recovery in the U.S. economy," Thomas Linebarger, chief operating officer of Cummins Inc., said during a teleconference with analysts yesterday. He said the company doesn't "expect to see any meaningful improvement until 2011" in the U.S.
At the same time, Linebarger said business in emerging markets for the Columbus, Indiana-based maker of diesel truck engines "has come back much faster than we had forecast."
Demand for total durable goods was led by a 16 percent jump in the transportation category, which is often volatile, today's report showed. Civilian aircraft bookings surged 105 percent after dropping 30 percent in August.
Boeing Co., the world's largest aerospace company, said it received orders for 117 aircraft last month, up from 10 in August. Industry data may not correlate precisely with the government statistics on a month-to-month basis.
Chicago-based Boeing this month raised its full-year profit forecast on rising demand, and said it is considering boosting production. Honeywell International Inc., a maker of car turbochargers and aircraft parts, also lifted its annual earnings projection.
Excluding Transportation
Bookings excluding transportation equipment unexpectedly fell 0.8 percent, the second drop in three months. They were predicted to rise 0.5 percent, the survey median showed.
The drop in orders for non-defense capital equipment reflected a 19 percent decrease in orders for communications gear, the biggest decrease since January 2008.
Companies are raising cash, while limiting spending on equipment or stepping up hiring.
Cisco Systems Inc., Microsoft Corp. and Google Inc. account for the biggest portion of some $943 billion in cash companies are retaining, Moody's said yesterday in a report. That's up from $937 billion at the end of 2009 and $775 billion in the prior year.
Companies have a ratio of cash to capital expenditures of 1.64, possibly an all-time high, the New York-based ratings firm said, compared with 1.1 in December 2008.
To contact the reporter on this story: Shobhana Chandra in Washington schandra1@bloomberg.net
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
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