Weak US core capital goods orders point to deepening business investment downturn

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New orders for key U.S.-made capital goods fell sharply in February as demand for machinery and other products slumped, suggesting a deepening contraction in business investment that analysts said signaled the economy was already in recession.

U.S. made plywood is shown for sale in Los Angeles, California, U.S., April 26, 2017. REUTERS/Mike Blake


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WASHINGTON: New orders for key U.S.-made capital goods fell sharply in February as demand for machinery and other products slumped, suggesting a deepening contraction in business investment that analysts said signaled the economy was already in recession.

The coronavirus pandemic has further darkened the outlook for business investment as measures to contain the highly contagious virus have brought the country to a sudden stop. The Federal Reserve has taken extraordinary steps to soften the hit on the economy. U.S. senators were set to vote on Wednesday on a record US$2 trillion fiscal stimulus package.

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"Business investment is the key swing factor in every recession and right now the pendulum is swinging the wrong way with declining orders likely to drag the economy over the cliff and down into recession in March," said Chris Rupkey, chief economist at MUFG in New York.

Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, dropped 0.8per cent in February after rising by a slightly downwardly revised 1.0per cent in January, the Commerce Department said on Wednesday.

These so-called core capital goods orders were previously reported to have increased 1.1per cent in January.

Economists polled by Reuters had forecast core capital goods orders dropping 0.4per cent in February. There were decreases in orders for machinery, primary metals and computers and electronics products last month. But demand for electrical equipment, appliances and components increased 1.3per cent last month.

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Shipments of core capital goods fell 0.7per cent last month. Core capital goods shipments are used to calculate equipment spending in the government's gross domestic product measurement.

They increased 1.1per cent in January. Business investment has contracted for three straight quarters, the longest such stretch since 2009. Economists have blamed the business investment rot on the Trump Administration's 20-month-old trade war with China. The weakness in business investment comes at a time when corporate profits are weakening.

"Given that profits are likely now declining, financial market conditions have tightened and the economy contracting, business investment will take it on the chin," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania. "Business investment in equipment will drop sharply in the second quarter."

Stocks on Wall Street extended their massive rally from Tuesday, with investors comforted by the huge stimulus package. The dollar fell against a basket of currencies, while U.S. Treasury prices rose.

ABRUPT HALT

The coronavirus, which causes a respiratory illness called COVID-19, has brought the economy to a abrupt halt, with governors in at least 18 states, accounting for nearly half the country's population, ordering residents to stay mostly indoors.

"Non-essential" businesses have also been ordered closed, leading to massive unemployment and a rush to apply for jobless benefits. ARead More – Source

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