Key U.S.-manufactured capital goods saw unexpectedly higher new orders in February, but data from the previous month was dramatically revised downward, raising the possibility that company spending on equipment may struggle to recover in the first quarter.
S&P Global’s survey released on Friday indicated that business activity picked up in March, but manufacturing shrank for the sixth consecutive month. The reports almost certainly prove that the industrial sector is in a recession due to rising borrowing costs. The prognosis for business investment and manufacturing remains uncertain as a result of the recent failure of two regional banks and the tightening of financial conditions.
Oren Klachkin, the principal U.S. economist at Oxford Economics in New York, said, “We predict gloomier times ahead as spending declines, lending requirements tighten, and higher interest rates than the post-global financial crisis period make it costlier to purchase capital goods and fund investment.” “The new wave of stress in the banking industry will further exacerbate impending problems.”
According to the Commerce Department, orders for non-defense capital goods excluding airplanes, a frequently followed indicator of company spending intentions, climbed 0.2% last month. These so-called core capital goods orders increased by 0.3% in January instead of the previously reported 0.8%, according to revised data.
Core capital goods orders were expected to remain steady by economists surveyed by Reuters. In February, core capital goods orders increased 4.3% year over year. Inflation correction is not applied to the data. In contrast to monthly increases in orders for core capital items, producer prices for completed goods, excluding food, have increased.
Hence, orders that were adjusted for inflation were subpar. According to regional Federal Reserve bank factory surveys, company confidence has remained negative so far this year, which is consistent with the study.
That was confirmed by the S&P Global survey, which showed that its flash manufacturing PMI increased from 47.3 in February to a still-subdued 49.3 in March. 11.3% of the U.S. economy’s manufacturing sector has shrunk for two consecutive quarters as rising loan rates reduce consumer demand for goods, which are frequently financed.
Together with this shift in spending, exports are being hampered by the past rise of the dollar and the slow pace of global growth. The inventory cycle is also moving, and businesses are stocking less frequently.
There are predictions that credit availability for families and businesses may decrease as a result of banks tightening lending rules in the wake of recent upheaval on the financial markets.
In response to the stress on the financial markets, the Federal Reserve increased its benchmark overnight interest rate by a quarter of a percentage point on Wednesday, but also signaled that it was considering delaying future rises in borrowing costs.
On fresh concerns that the banking industry would spread contagion, stocks tumbled on Wall Street. Against a basket of currencies, the dollar increased. Prices for US Treasury bonds increased.
According to Andrew Hunter, deputy chief U.S. economist at Capital Economics, “it would be a surprise if it didn’t deliver a further blow to investment, particularly for small enterprises more dependent on bank funding. The degree of the drag from events over the previous couple of weeks remains to be seen.
Orders for manufactured metal goods, primary metals, electrical machinery, appliances, and component parts all increased last month. However, orders for machinery decreased and those for computers and electronic devices declined.
Core capital goods shipments were steady after rising by 0.9% in January. In the gross domestic product calculation, equipment investment is based on shipments of core capital items. Shipments of capital goods other than those for the military, which are included in calculating GDP, decreased by 0.6% after falling 1.7% in January.
From a 2.6% pace, Goldman Sachs economists revised their first-quarter GDP growth estimate downward to 2.4% annualized growth. In the fourth quarter, businesses cut back on their equipment purchases, which slowed GDP growth to 2.7%. In the third quarter, the economy expanded at a 3.2% annual rate.
Conrad DeQuadros, senior economic advisor at Brean Capital in New York, declared that “the manufacturing sector is in recession and will be a drag on the larger economy.” “The first-quarter GDP report may show a real-term decline in business equipment spending.”
Orders for products with a three-year or longer lifespan, such as toasters and aircraft, fell 1.0% in February. In January, these so-called durable goods orders fell 5.0%.
The volatile civilian aviation market had a 6.6% drop in durable goods orders last month, following a 56.3% drop in January. Just five aircraft orders were placed in February, down significantly from the 55 placed in January, according to a post on Boeing’s website.
After falling 14.0% in January, orders for transportation equipment dropped 2.8%. Orders for automobiles fell 0.9%.
Manufacturers’ unfulfilled orders decreased by 0.1% after remaining constant in January, which is bad news for factory output. Factory inventories increased 0.2%.
Erik Johnson, a senior economist at BMO Financial Markets in Toronto, stated that “as stockpiles build, container volume to U.S. ports is dropping, suggesting that shipments could deteriorate more in the months ahead.”