New orders for key U.S.-manufactured capital goods unexpectedly rose in May, but the prior month's data was revised down, suggesting that businesses remained cautious about new capital investment because of higher borrowing costs and an uncertain economic outlook.
The report from the Commerce Department on Tuesday also showed shipments of these non-defense capital goods excluding aircraft, which are a closely watched proxy for business spending plans, increasing moderately last month. The marginal rise in these so-called core capital goods shipments pointed to continued weakness in business spending on equipment in the second quarter, though the pace of decline likely slowed.
"There are some notable downside risks around the outlook given the challenges companies are facing, not only from higher borrowing costs, but softer demand and potentially a further tightening in credit conditions," said Rubeela Farooqi, chief U.S. economist at High Frequency Economics in White Plains New York.
Core capital goods orders increased 0.7% last month. Data for April was revised lower to the core capital goods rising 0.6% instead of 1.3% as previously reported.
Economists polled by Reuters had forecast core capital goods orders would be unchanged.
The Federal Reserve has raised its policy rate by 500 basis since March 2022, when it embarked on its fastest monetary policy tightening campaign in more than 40 years. The U.S. central bank has signaled two additional rate hikes this year to cool inflation.
Orders for electrical equipment, appliances and components rebounded 1.7% while bookings for computers and electronic products rose 0.3%. Orders for machinery surged 1.0%.
Shipments of core capital goods gained 0.2% in May after climbing 0.4% in April. Core capital goods shipments are one of the inputs used to calculate equipment spending in the gross domestic product measurement.
Business spending on equipment has declined for two straight quarters, the first back-to-back decline since 2020.
With business spending on equipment weak, manufacturing is feeling the pressure. The sector, which accounts for 11.3% of the U.S. economy, has also been dealt a blow by a shift in spending from goods to services. Businesses are also carefully managing inventories and the delayed impact from a tightening in credit conditions is expected to hit factories later this year.
The Institute for Supply Management's measure of national factory activity has remained below the 50 threshold, which indicates contraction in manufacturing, for seven straight months. That is the longest such stretch since the Great Recession. Most economists expect a recession by year end.
Orders for so-called durable goods -- items ranging from toasters to aircraft that are meant to last three years or more -- shot up 1.7% in May after increasing 1.2% in April. Transportation equipment orders rose 3.9% after advancing 4.8% in the prior month. Motor vehicle orders accelerated 2.2% after being unchanged in April.
The volatile civilian aircraft category experienced a 32.5% rebound in orders after dropping 2.0% in April. Boeing (BA.N) reported on its website that it had received 69 aircraft orders, up from 34 in April.
