Orders for US Capital Goods Unexpectedly Dropped in May

Orders for US Capital Goods Unexpectedly Dropped in May

Sluggish global demand, the lingering effects of last year’s surge in the dollar, weaker corporate profits and a sharp drop in investment in the energy sector have weighed on companies’ investment decisions. 

Orders for business equipment unexpectedly fell in May by the most in three months, pointing to weakness in investment even before the likely damage to confidence stemming from U.K. voters’ decision to leave the European Union.

Key Points

Orders for non-military capital goods excluding aircraft, a proxy for future business investment in items like computers, engines and communications gear, declined 0.7% after falling 0.4% in April Shipments of such business equipment, used in calculating gross domestic product, fell 0.5% after climbing 0.6%.  Total bookings for durable goods -- or those meant to last at least three years -- slumped a more-than-expected 2.2% (forecast was 0.5% drop)

Big Picture

Sluggish global demand, the lingering effects of last year’s surge in the dollar, weaker corporate profits and a sharp drop in investment in the energy sector have weighed on companies’ investment decisions. American factories are now faced with a new challenge -- the fallout from the U.K.’s decision to exit the EU.

Economist Takeaways

‘It’s a reflection of the uncertainty we’ve seen emerging, not only in the U.S. but also globally,” said Millan Mulraine, deputy head of U.S. macro strategy for TD Securities USA LLC in New York, who had projected a drop in orders for business equipment. “The outlook is likely to soften even more. We may see a further downdrift in investment activity.”  “With oil having rebounded and the rig count beginning to creep higher, core capex orders are now bottoming too, and will have clearly started to rise by the end of the third quarter,” Ian Shepherdson, chief economist at Pantheon Macroeconomics Ltd. in Newcastle, U.K., said in a research note. “The worst is over.”

The Details

Excluding transportation equipment, which is often volatile, orders declined 0.3% after a 0.5% advance Excluding defense equipment, new orders declined 0.9% after a 3.7% jump the prior month Unfilled orders for non-defense capital goods equipment excluding aircraft fell 0.3% after a 0.2% decline Inventories of durable goods fell 0.3% after a 0.4% decrease in April.

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