Business Spending Buoyant In October

Despite new orders for key U.S.-made capital goods unexpectedly falling in October, a steady increase in shipments is a sign of strong business investment and a boost for the economy.

According to news from Reuters, strong business investment and tightening labor market conditions likely mean the Federal Reserve will raise interest rates next month.

“Fed policymakers will likely be impressed with the positive overall trend of business investment in equipment this year,” said Chris Rupkey, chief economist at MUFG in New York. “Interest rates do not need to be left at such low levels if the goal is to further business investment.”

While orders for non-defense capital goods (excluding aircraft) declined 0.5 percent last month, they increased at a 14.5 percent annualized pace in the three months prior to October. Core capital goods orders rose 4.4 percent on a year-on-year basis and shipments rose 0.4 percent last month, pushing the annualized three-month pace to 13.1 percent.

“The solid trend for the shipments data through October suggests that the fourth quarter will be another strong quarter for equipment spending,” said Daniel Silver, an economist at JPMorgan in New York. “We see some upside risk to our real GDP growth forecast for the fourth quarter.”

Core capital goods shipments have been increasing since February, partly due to expectations that Republicans will push through hefty corporate tax cuts.

“With the passage of a corporate tax cut becoming more possible, the likelihood is that future business capital spending should be strong,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

In addition, business spending on equipment has sustained economic growth for the past four quarters. In turn, that spending has helped boost manufacturing, which accounts for about 12 percent of the U.S. economy. Last month, there were increases in orders for machinery, electrical equipment, appliances and components, primary metals and computers and electronic products.

The economy grew at a 3.0 percent annualized rate in the third quarter, and growth estimates for the fourth quarter range from as low as a 2.5 percent pace to as high as a 3.4 percent rate.