Core capital goods orders drop 0.2% in May

Washington

NEW orders for key US-made capital goods and shipments unexpectedly fell in May, but data for the prior month was revised higher, suggesting moderate growth in business spending on equipment in the second quarter.

Other data on Wednesday showed a sharp narrowing in the goods trade deficit last month, and solid increases in retail and wholesale inventories, the latest indications that the economy was accelerating this quarter after losing some steam at the start of the year.

There are, however, fears that escalating tensions between the US and its major trade partners, including China, Mexico, Canada and the European Union, could hurt business sentiment, disrupt supply chains and undercut economic growth.

The Commerce Department said orders for non-defence capital goods excluding aircraft, a closely watched proxy for business spending plans, slipped 0.2 per cent last month. Data for April was revised to show the so-called core capital goods orders surging 2.3 per cent instead of the previously reported 1.0 per cent rise.

Economists polled by Reuters had forecast core capital goods orders gaining 0.5 per cent last month. Core capital goods orders increased 6.8 per cent on a year-on-year basis.

Core capital goods shipments are used to calculate equipment spending in the government's gross domestic product measurement.

They were previously reported to have gained 0.9 per cent in April. The drop in core capital goods shipments last month, if sustained, suggests a small contribution to second-quarter GDP growth from business spending on equipment.

In another report on Wednesday, the Commerce Department said the goods trade deficit declined 3.7 per cent to US$64.8 billion in May as an increase in exports outpaced a rise in imports. The department also said wholesale inventories increased 0.5 per cent in May and stocks at retailers gained 0.4 per cent.

The trade and inventory data added to bullish sentiment on the labour market and consumer spending, suggesting that economic growth surged in the second quarter. Gross domestic product estimates for the April-June period are as high as a 4.7 per cent annualised rate. The economy grew at a 2.2 per cent pace in the first quarter.

The dollar was trading higher against a basket of currencies. Prices for US Treasuries rose while US stock index futures were little changed.

Despite May's decline in core capital goods orders, business spending on equipment remains supported by the Trump administration's US$1.5 trillion income tax cut package, which came into effect in January.

But economists caution that the Trump administration's protectionist trade policy could offset the fiscal stimulus. President Donald Trump has imposed tariffs on steel and aluminum imports to protect domestic industries from what he says is unfair foreign competition.

Mr Trump has also said he would press ahead with hefty tariffs on US$50 billion of Chinese imports and threatened to impose a 20 per cent duty on all imports of European Union-assembled cars. REUTERS