By Lucia Mutikani
WASHINGTON (Reuters) – New orders for key U.S.-made capital goods unexpectedly rose in March, but the gains are not likely to be sustainable amid the novel coronavirus outbreak, which has abruptly shut down the country and contributed to a collapse in crude oil prices.
Despite the slight pickup in demand reported by the Commerce Department on Friday, shipments of these goods dropped further last month, suggesting that a downturn in business investment persisted into the first quarter and would contribute to what economists expect will be the sharpest economic contraction since the Great Recession.
“That’s not going to last with company after company saying they are slashing capex in this month’s earnings calls,” said Chris Rupkey, chief economist at MUFG in New York. “If growth isn’t happening there’s no need to buy the equipment to produce more goods if the demand has simply evaporated.”
Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, edged up 0.1% last month. Data for February was revised up to show these so-called core capital goods orders falling 0.8% instead of dropping 0.9% as previously reported.
Economists polled by Reuters had forecast core capital goods orders plunging 6.0% in March.
The economic picture is deteriorating rapidly amid nationwide lockdowns to control the spread of COVID-19, the potentially lethal respiratory illness caused by the virus. A record 26.5 million Americans have filed for unemployment benefits since mid-March. Retail sales and homebuilding have collapsed, while business and consumer sentiment have soured.
Stocks on Wall Street were trading slightly higher. The dollar was little changed against a basket of currencies, while U.S. Treasury prices fell.
Much of the slump in economic activity occurred in the second half of March when states and local governments ordered nonessential businesses to close and enforced “stay-at-home” orders that have affected more than 90% of Americans. A handful of states, including Georgia, are reopening their economies this weekend against the advice of health experts.
WEAK DEMAND
Demand for business equipment was already tanking, one of the casualties of the Trump administration’s trade war with China, well before the coronavirus hit U.S. shores. That has pressured manufacturing, which declined at its sharpest pace in 11 years in the first quarter.
Business investment has contracted for three straight quarters, the longest such stretch since 2009. With crude oil prices plunging and COVID-19 hitting cash flow at businesses, spending could remain depressed well after the economy reopens.
According to a Reuters survey of economists, gross domestic product probably contracted at a 4.0% annualized rate in the first quarter. That would be the deepest contraction since 2009 and would end the longest economic expansion in U.S. history. The economy grew at a 2.1% pace in the fourth quarter.
The government will publish its snapshot of first-quarter GDP next Wednesday. Economists believe the economy entered recession in March.
The National Bureau of Economic Research, the private research institute regarded as the arbiter of U.S. recessions, does not define a recession as two consecutive quarters of decline in real GDP, as is the rule of thumb in many countries. Instead, it looks for a drop in activity, spread across the economy and lasting more than a few months.
Last month’s gain in core capital goods orders reflected a 1.5% increase in demand for electrical equipment, appliances, and components. There were, however, decreases in orders for machinery, primary metals, fabricated materials and computers and electronic products last month.
A 41.0% collapse in demand for transportation equipment led to a 14.4% plunge in orders for durable goods, items ranging from toasters to aircraft that are meant to last three years or more. Durable goods orders rose 1.1% in February.
Orders for transportation equipment advanced 4.6% in February. March’s tumble in transportation equipment orders came as demand for civilian aircraft slumped 295.7%.
Though Boeing
Orders for motor vehicles and parts plummeted 18.4% in March, wiping out February’s 1.6% increase.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)
