New orders for key U.S.-manufactured capital goods increased by the most in five months in January while shipments of those so-called core goods rebounded, suggesting that business spending on equipment picked up at the start of the first quarter.
Some of the larger-than-expected rise in core capital goods orders reported by the Commerce Department on Monday, which ended two straight monthly declines, likely reflected higher prices last month. It joined solid consumer spending and robust labor market data in painting an upbeat picture of the economy.
The string of strong data has raised the risk that the Federal Reserve could hike interest rates to a higher level than currently estimated.
"Business orders for new equipment are a key indicator of investment in the economy's future and it counts as good news that long-lived capital goods are seeing more orders to start the year," said Christopher Rupkey, chief economist at FWDBONDS in New York. "Orders get canceled if companies see a loss of revenues and sales, and that is not what the data are saying right now even if many CEOs are battening down the hatches and making preparations for recession later this year."
Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, rose 0.8% last month. These core capital goods orders dropped 0.3% in December. Economists polled by Reuters had forecast core capital goods orders edging up 0.1%. Core capital goods orders increased 5.3% on a year-on-year basis in January.
The data is not adjusted for inflation. Producer prices for capital goods shot up in January.
The surge in orders is at odds with business surveys that have suggested manufacturing, which accounts for 11.3% of the economy, was in recession. Business sentiment soured as the U.S. central bank aggressively raised interest rates.
But demand for goods, which are typically bought on credit, continues to hold up. Government data on Friday showed consumer spending on long-lasting manufactured goods like motor vehicles and household furnishings rebounded sharply in January, helping to boost consumer spending. Data this month from the Fed showed manufacturing production accelerating in January.
"Given the fairly broad strength in this report and the fact that manufacturing activity surprised to the upside in the industrial production data released earlier this month, we can't completely dismiss this as rebound noise," said Shannon Seery, an economist at Wells Fargo (NYSE:WFC) in New York. "But we still doubt the string of weakness we saw toward the end of last year is the full extent of the contraction for manufacturing."
Stocks on Wall Street were trading higher. The dollar fell against a basket of currencies. U.S. Treasury prices rose.
Sources: Investing