Business equipment spending rises for the second straight month

Durable goods orders came in stronger than expected in May, driven by a sharp increase in aircraft orders from Boeing, the Commerce Department reported on Tuesday.

Core orders on capital goods—a proxy for private investment excluding aircraft and defense—rose by 0.7% on the month, also above market expectations.

Despite May’s top-line upside surprises, our forecast for gross domestic product does not show any meaningful change in the private investment component after Tuesday’s release. Our GDP growth forecast stays at 1.8% for the quarter.

The reason for our tempered outlook is that April’s data on core orders was revised significantly lower, to a 0.6% gain from 1.3%, pushing the three-month moving annualized average to a 0.7% increase from 1.5%, the lowest in four months.

Shipments of core capital goods, which feed into the calculation of second-quarter GDP, stayed in line with the consensus, growing by 0.2% on the month after a slight downward revision to a 0.4% increase for the prior month.

That said, business investment spending has defied expectations since April, after the hiccup within the banking sector was sorted out.

In the short run, given the elevated probability of a recession in the second of half of the year, we should expect some pullback in business spending especially with interest rates remaining elevated. Regional surveys on manufacturing activities showed continuing signs of weaknesses across sectors.

But in the longer run, fueled by the surge in artificial intelligence interest on top of persistent labor shortages in the post-pandemic era, companies will most likely continue to lean toward spending more on productivity-enhancing technology and equipment.

Inside the report, orders for electrical equipment led the increase, rising by 1.7% on the month, followed by machinery at 1.0%. Shipments of electrical equipment also led the increase for total shipments, rising by 0.8%.

This article was written by Tuan Nguyen and originally appeared on 2023-06-27. Reprinted with permission from RSM US LLP.
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