Durable Goods Demand Shows Investment Picking Up

U.S. Economy: Durable Goods Demand Shows Investment Picking Up

By Timothy R. Homan

July 28 (Bloomberg) -- Business investment in the U.S. picked up in the second quarter, helping sustain the economic recovery, June data on durable goods showed today.

Orders for non-military capital equipment excluding aircraft climbed 0.6 percent last month after jumping 4.6 percent in May, more than previously reported, figures from the Commerce Department showed in Washington. Sales of such gear, used in calculating gross domestic product, also rose.

“Business investment remains the bright spot in an otherwise dull economic outlook,” said Jay Feldman, an economist at Credit Suisse in New York. “Corporations have actually underinvested quite dramatically in recent years and, to some extent, we are catching up.”

Eaton Corp. is among manufacturers benefiting from a pickup in demand as companies in the U.S. and abroad update equipment. The gains will partially compensate for a slowdown in consumer spending that is causing the world’s largest economy to cool heading into the second half of the year.

Total orders for durable goods, those meant to last at least three years, unexpectedly dropped 1 percent, depressed by a decrease in demand for aircraft which is often volatile.

Stocks fell on concern over the weakness in overall orders. The Standard & Poor’s 500 Index decreased 0.3 percent to 1,110.27 at 11:03 a.m. in New York. Treasury securities were little changed.

Unexpected Drop

Economists forecast total orders would climb 1 percent, according to the median of 76 projections in a Bloomberg News survey. Estimates ranged from a drop of 1 percent to a 4 percent gain. The Commerce Department revised May orders to show a 0.8 percent drop compared with a previously reported decrease of 0.6 percent.

Bookings for non-defense capital goods excluding aircraft are a proxy for future business investment. Over the past three months, these orders climbed at a 25 percent annual pace, up from a 15 percent gain in the three months to March, signaling companies plan to ramp up spending.

Shipments of those items, used in calculating gross domestic product, increased 0.2 percent after rising 1.5 percent in May.

Demand in June increased for computers, communications gear and electrical equipment.

Eaton, the Cleveland-based maker of engine valves and transmissions, last week boosted its profit projections for 2010 on rising demand for truck parts and hydraulic systems.

‘Better’ Year

“This year is shaping up to be better than we had forecast,” Chief Executive Officer Sandy Cutler said in a July 21 statement.

A Commerce Department report in two days may show the U.S. economy grew at a 2.5 percent annual pace from April through June compared with a 2.7 percent rate in the first three months of the year, according to the median estimate of analysts surveyed. Consumer spending rose 2.4 percent after a 3 percent first-quarter gain, the survey showed.

Economists at Morgan Stanley reiterated their 3.2 percent forecast for second-quarter GDP after the durable goods report. Growth was “led by a surge in business capital spending,” Ted Wieseman, a Morgan Stanley economist in New York, said in a research report.

The anticipated slowdown in household purchases last quarter means business investment will also cool later this year, said Steven Wieting, managing director of economic and market analysis at Citigroup Global Markets in New York.

Consumer Spending

“We are looking for sustained expansion in capital investment this year, but not at rates as strong as in the second quarter,” said Wieting in a telephone interview. “You can’t ignore the end consumer, ever.”

Growing demand from overseas is also helping American factories. Exports climbed 21 percent in the 12 months ended May, the biggest year-over-year gain since comparable records began in 1992, according to Commerce Department data.

Recent reports have shown Europe is so far weathering the credit crisis. The continent’s service and manufacturing industries unexpectedly accelerated in July, German business confidence surged to a three-year high and the British economy grew in the second quarter at the fastest pace in four years.