U.S. manufacturing shows resilience despite rising interest rates
Send a link to a friend
[June 28, 2022] By
Lucia Mutikani
WASHINGTON (Reuters) - New orders for
U.S.-made capital goods and shipments increased solidly in May, pointing
to sustained strength in business spending on equipment in the second
quarter, but rising interest rates and tighter financial conditions
could slow momentum.
The nearly broad rise in orders reported by the Commerce Department on
Monday occurred despite deteriorating business and consumer sentiment as
well as heightened fears of a recession. The gains partly reflected
higher prices. The Federal Reserve is aggressively tightening monetary
policy to quell inflation.
"There's some inflation behind the increase in orders, but,
nevertheless, there are a lot of dollars flowing through the economy
right now," said Christopher Rupkey, chief economist at FWDBONDS in New
York. "Businesses would not order new equipment if they thought
consumers and other companies were looking to pull back their
purchases."
Orders for non-defense capital goods excluding aircraft, a closely
watched proxy for business spending plans, rose 0.5% last month. These
so-called core capital goods orders gained 0.3% in April. Economists
polled by Reuters had forecast core capital goods orders would climb
0.3%.
![](http://archives.lincolndailynews.com/2022/Jun/28/images/ads/current/stuffedaria_sda_HEROS_2022.png)
Those orders were up 10.2% on a year-on-year basis 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 electronic
products. But orders for electrical equipment, appliances and components
fell 0.9%, while demand for fabricated metal products was unchanged.
Core capital goods
https://graphics.reuters.com/USA-STOCKS/myvmnrxwxpr/
corecapgoods.png
The better-than-expected increase in core capital goods orders
underscored underlying strength in manufacturing, which accounts for 12%
of the economy, despite weak factory surveys. A survey from S&P Global
last week showed business confidence dove in June to the lowest level
since September 2020.
Demand for goods remains strong even as spending is reverting back to
services. Production also continues to be underpinned by businesses
still rebuilding inventories, even as some major retailers like Walmart
and Target have reported that they are carrying too much merchandise.
"We've seen two of the largest inventory builds on record in the past
two quarters, but, taken in the context of still solid sales,
inventories are not yet at a concerning level in our view," said Tim
Quinlan, a senior economist at Wells Fargo in Charlotte, North Carolina.
"We take the rebuild in inventories as a signal that supply chain
problems are slowly easing."
Stocks on Wall Street were mixed. The dollar fell against a basket of
currencies. U.S. Treasury yields rose.
STRONG SHIPMENTS
Core capital goods shipments increased 0.8% last month, matching April's
gain. Core capital goods shipments are used to calculate equipment
spending in the gross domestic product measurement. Despite some boost
from higher prices, shipments still showed strength after adjusting for
inflation.
[to top of second column] |
![](../images/062822PIX/busine55.jpg)
General view of metal cutting machines inside Gent Machine Co.'s
55-employee factory in Cleveland, Ohio, U.S., May 26, 2021.
REUTERS/Timothy Aeppel/File Photo
![](http://archives.lincolndailynews.com/2017/Jul/22/images/ads/current/rohlfs_lda_072017.png)
Business spending on equipment is on track to grow again this quarter, though at
a slower pace than the 13.2% annualized rate notched in the January-March
period.
Robust business investment in equipment helped to sustain strong domestic demand
in the first quarter even as the economy contracted at a 1.5% rate, hit by a
record trade deficit. Growth estimates for the second quarter range from as low
as a 0.3% rate to as high as a 2.9% pace.
The Fed this month raised its policy rate by three-quarters of a percentage
point, its biggest hike since 1994. The U.S. central bank has increased its
benchmark overnight interest rate by 150 basis points since March.
"The unexpected strength won't change anything for monetary policy except,
perhaps, making the Fed just a smidgen more comfortable with their next rate
hike decision," said Will Compernolle, a senior economist at FHN Financial in
New York.
Orders for durable goods, items ranging from toasters to aircraft that are meant
to last three years or more, advanced 0.7% in May after rising 0.4% in April.
They were lifted by a 0.8% gain in orders for transportation equipment, which
followed a 0.7% increase in April.
Durable goods
https://graphics.reuters.com/USA-STOCKS/jnvweobznvw/
durablegoods.png
Motor vehicle orders climbed 0.5% after edging up 0.1% in April. Orders for the
volatile civilian aircraft category fell 1.1%. Boeing reported on its website
that it had received 23 aircraft orders in May, down from 46 in April.
Shipments of durable goods surged 1.3% last month after gaining 0.3% in April.
Unfilled durable goods orders rose 0.3% and inventories increased 0.6%.
![](http://archives.lincolndailynews.com/2022/Jun/28/images/ads/current/sorrentos_sda_HEROS_2022.png)
While manufacturing is showing resilience, higher borrowing costs are cooling
the housing market.
A separate report on Monday from 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 portion of the prior six months'
declines, leaving contacts down 13.6% on a year-on-year basis.
Pending home sales https://graphics.reuters.com/USA-STOCKS/lgpdwbaekvo/phs.png
"Higher rates have been weighing significantly on the housing market and will
continue to do so in the immediate future," said Daniel Silver, an economist at
JPMorgan in New York.
(Reporting by Lucia Mutikani; Editing by Toby Chopra and Paul Simao)
[© 2022 Thomson Reuters. All rights
reserved.]This material may not be published,
broadcast, rewritten or redistributed.
Thompson Reuters is solely responsible for this content. |