Business spending on equipment falls more than expected

REAL ECONOMY BLOG | April 26, 2023

Authored by RSM US LLP

Orders and shipments of core capital goods that exclude defense and aircraft spending, a key measure of private business investment, both fell by 0.4% in March, the Commerce Department reported on Wednesday.

It is now clear that the nonresidential component of private investment has caught up with the residential component, showing more cracks under the pressure of steep interest rate hikes over the past year.

Together with new data on trade and inventories that showed a narrowing trade deficit, the core capital goods figures helped push our forecast for gross domestic product growth in the first quarter down slightly, to 2.2% from 2.3%.

Durable goods orders

Both the orders and shipments categories of core capital goods came in lower than market forecasts. In addition, February’s numbers had sharp downward revisions, plunging to a 0.7% decline for core orders and a 0.4% drop for core shipments from the initial estimates of a 0.1% decline for both.

Given the many announcements for layoffs and hiring freezes recently in addition to slowing demand, businesses have been cutting costs in preparation for a potential economic downturn.

Core capital orders and shipments have dropped four times in five months, pushing the three-month annualized moving averages to a 1.2% decline for core orders and a 0.1% increase for core shipments.

It is impossible to ignore the downward trend in capital expenditures by businesses as a result of higher borrowing costs and the risks around the banking system, which in our view should be one of the key factors that tip the economy toward a recession in the second half of the year.

Risks to GDP growth

Wednesday’s data on core capital goods, which feed directly into the calculation of nonresidential private investment, should add downside risks to our previous forecast of a 2.3% increase in gross domestic product in the first quarter. The government’s initial estimate of GDP for the first quarter will be released on Thursday.

Some of the decline in capital goods orders and shipments was offset by the upside surprises from the advanced goods trade deficit, which came in at $84.6 billion instead of $90 billion.

Our GDP forecast is now showing 2.2% growth for the first quarter, driven by solid consumer spending and exports.

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This article was written by Tuan Nguyen and originally appeared on 2023-04-26.
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