US manufacturing sector shows resilience despite rising interest rates

General view of metal cutting machines inside the 55-employee Gent Machine Co. factory in Cleveland, Ohio, U.S., May 26, 2021. REUTERS/Timothy Aeppel/File Photo

WASHINGTON, June 27 (Reuters) – New orders for U.S.-made capital goods and shipments rose sharply in May, pointing to continued strength in business capital spending in the second quarter, but rising rates interest rates and tighter financial conditions could slow momentum.

The near-widespread rise in orders reported by the Commerce Department on Monday came despite deteriorating business and consumer sentiment and heightened fears of a recession. The gains partly reflect higher prices. The Federal Reserve is aggressively tightening monetary policy to curb inflation.

“There is some inflation behind the increase in orders, but, nonetheless, there are a lot of dollars flowing through the economy right now,” said Christopher Rupkey, chief economist at FWDBONDS in New York. “Companies wouldn’t order new equipment if they thought consumers and other businesses were looking to withdraw their purchases.”

Orders for non-military capital goods excluding aircraft, a closely watched indicator of business spending plans, rose 0.5% last month. These so-called basic capital goods orders gained 0.3% in April. Economists polled by Reuters had forecast orders for core capital goods to rise 0.3%.

These orders rose 10.2% year-on-year in May. Last month’s increase reflected a 1.1% rise in machinery orders. There was also strong demand for primary metals as well as computers and electronics. However, orders for electrical equipment, appliances and components fell 0.9%, while demand for fabricated metal products remained unchanged.

The better-than-expected rise in orders for core capital goods underscored the underlying strength of manufacturing, which accounts for 12% of the economy, despite weak factory surveys. An S&P Global survey last week showed business confidence plunged in June to the lowest level since September 2020.

Demand for goods remains strong even though spending shifts to services. Production also continues to be buoyed by companies still replenishing inventory, although some large retailers like Walmart (WMT.N) and Target (TGT.N) have reported they are carrying too much merchandise.

“We have seen two of the largest inventory builds on record in the past two quarters, but taken against the backdrop of continued strong sales, inventories are not yet at a concerning level in our view,” Tim Quinlan said. , Senior Economist. at Wells Fargo in Charlotte, North Carolina. “We take the restocking as a signal that supply chain issues are slowly easing.”

Stocks on Wall Street were mixed. The dollar fell against a basket of currencies. US Treasury yields rose.

STRONG SHIPMENTS

Shipments of basic capital goods rose 0.8% last month, matching April’s gain. Basic capital goods shipments are used to calculate capital expenditures in the gross domestic product measure. Despite some boost from higher prices, shipments still showed strength after adjusting for inflation.

Business capital spending is on track to grow again this quarter, but at a slower pace than the 13.2% annualized rate recorded in the January-March period.

Robust business investment in equipment helped support strong domestic demand in the first quarter, even as the economy contracted at a rate of 1.5%, hit by a record trade deficit. Growth estimates for the second quarter range from as low as 0.3% to as high as 2.9%.

The Fed raised its key rate this month by three-quarters of a percentage point, its largest hike since 1994. The US central bank has raised its key overnight rate by 150 basis points since March.

“The unexpected strength won’t change anything in monetary policy except maybe make the Fed a little more comfortable with its next rate hike decision,” said Will Compernolle, senior economist at FHN Financial in New York. .

Orders for durable goods, items ranging from toasters to airplanes meant to last three years or more, rose 0.7% in May after rising 0.4% in April.

They were supported by a 0.8% rise in orders for transportation equipment, which followed a 0.7% rise in April.

Motor vehicle orders rose 0.5% after edging up 0.1% in April. Orders for the volatile civil aircraft category fell 1.1%. Boeing (BA.N) said on its website that it received 23 plane orders in May, compared to 46 in April.

Shipments of durable goods jumped 1.3% last month after gaining 0.3% in April. Unfilled durable goods orders rose 0.3% and inventories rose 0.6%.

While the manufacturing sector is showing resilience, rising borrowing costs are cooling the housing market.

A separate report released Monday by the National Association of Realtors showed its pending home sales index, based on signed contracts, rose 0.7% last month. The increase, however, only reversed a tiny fraction of the declines of the previous six months, leaving contacts down 13.6% on an annual basis.

“Rising rates have weighed significantly on the housing market and will continue to do so for the immediate future,” said Daniel Silver, an economist at JPMorgan in New York.

Reporting by Lucia Mutikani; Editing by Toby Chopra and Paul Simao

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