November 27, 2012 / 1:38 PM / 8 years ago

Business spending plans improve despite fiscal cloud

WASHINGTON (Reuters) - A gauge of planned U.S. business spending increased in October by the most in five months, raising cautious optimism that the sharp cutbacks in capital investment during the summer are abating.

Fears of deep reductions in government spending and big tax hikes early next year, a combination known as the fiscal cliff, had caused firms to hunker down.

But orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, rose 1.7 percent last month, the Commerce Department said on Tuesday.

“While the improvement in demand offers some encouragement that the worse of the malaise in capital investment may be behind us, there is little to suggest that this may be the beginning of any meaningful upturn,” said Millan Mulraine, a senior economist at TD Securities in New York.

The increase in so-called core capital goods orders confounded economists’ expectations for a 0.5 percent fall.

Lawmakers and the Obama administration are engaged in talks to avoid automatic spending cuts and tax increases that could suck $600 billion from the economy early next year and fuel a fresh recession. Few visible signs of progress have emerged.

“With intense focus on the fiscal cliff and continued uncertainty surrounding the economic outlook in the new year, it remains to be seen whether the October advance can be maintained. It’s not clear that it can be,” said Omair Sharif, an economist at RBS in Stamford, Connecticut.

“One month does not make a trend and the trend firmly shows firms are still in a kind of a wait-and-see mode in terms of capital spending.”


Given the lag between orders and shipments, economists expect business investment to remain a drag on economic activity in the fourth quarter.

Shipments of core capital goods declined in October for a fourth straight month, and economists said the stronger orders might not translate into improved shipments until early 2013.

Still, a few economists bumped up their meager fourth-quarter GDP forecasts slightly because the drop in shipments was smaller than they expected. Core goods shipments are used to calculate business spending on equipment and software in the gross domestic product report.

In the third quarter, business spending tumbled for the first time since the 2007-09 recession ended, weighed down by the fiscal cliff, Europe’s long-running debt problems and slowing global demand.

While weakness in business spending has been restraining growth, the housing market is gaining momentum and consumer confidence is more bullish, which should support the recovery.

Single-family home prices rose for an eighth straight month in September, a separate report showed. The Standard & Poor’s/Case Shiller composite index of 20 metropolitan areas gained 0.4 percent in September on a seasonally adjusted basis.

Home building is expected to add to growth this year for the first time since 2005 and firming home prices bode well for residential construction activity.

“The strengthening in home prices is a plus for growth through various channels, including increased consumer spending because of wealth and confidence effects,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York.

A third report showed consumer confidence hit a 4-1/2 year high in November. Economists, however, warned that the fiscal cliff could erode sentiment in the months ahead.

Stocks on Wall Street ended down as investors worried over the lack of progress in working out a deal on the government’s budget problem, while prices for U.S. Treasury debt eked out modest gains. The dollar firmed against a basket of currencies.

Orders for U.S.-made durable goods — items meant to last three years or more — were unchanged in October as gains in machinery, fabricated metal products, and computer and electronic products offset the drag from automobiles, defense goods and civilian aircraft.

Economists had expected durable goods orders to fall 0.6 percent last month. They rose 9.2 percent in September.

Excluding transportation, orders rose 1.5 percent in October after increasing 1.7 percent the prior month.

Additional reporting by Edward Krudy in New York; Editing by Andrea Ricci, Tim Ahmann and Tim Dobbyn

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