US businesses cut back on their spending plans for a second straight month in July, suggesting slower growth ahead for the factory sector. The data from the Commerce Department on Friday underscored the toll on the US economy from the uncertainty spawned by the possibility of tighter fiscal policy next year and the debt crisis in Europe.
---- Gauge of business spending plans drops 3.4pc
---- Overall durable goods orders soar 4.2pc on aircraft
It led some economists to consider ratcheting back forecasts for economic growth and spurred traders to ramp up bets on further monetary stimulus from the Federal Reserve. "We are looking at a very soft trend in capital spending in the coming months," said Millan Mulraine, senior economist at TD Securities in New York. "Until we get some clarity on the fiscal outlook and the situation in Europe, the recovery is unlikely to gain the kind of traction needed to make it self-sustaining."
Non-defence capital goods orders excluding aircraft, a closely watched proxy for business investment plans, declined 3.4 percent after falling by a revised 2.7 percent in June. Economists polled by Reuters had expected a 0.7 percent rise after a previously reported 1.7 percent decline in June.
US stocks were higher at midday on news about the European Central Bank's plans for a new bond-buying program. Prices for US Treasury debt rose and the dollar firmed against a basket of currencies. The weakness in the business spending gauge was in keeping with regional manufacturing surveys showing a cooler growth pace of activity in a sector that has shouldered the economy's recovery from the 2007-09 recession.
The softness, which was also evident in shipments, could favour additional monetary easing by the Fed next month, even though other data on jobs, consumer spending and the housing sector suggested a bit of improvement in the economy early in the third quarter. "Firms seem very nervous about committing to investment projects at the moment. If they (Fed officials) look at this report, they will be concerned about the investment outlook," said Jeremy Lawson, a senior economist at BNP Paribas in New York.
Shipments of non-defence capital goods excluding aircraft, used to calculate equipment and software spending in the gross domestic product report, were flat after rising 1.5 percent in June. Unfilled orders of these so-called core capital goods fell by the most since August 2009, suggesting little need for factories to step up production for these items.
Minutes of the Fed's July 31-August 1 meeting released on Wednesday suggested further monetary stimulus could come soon unless economic data pointed to a "substantial" and "sustainable" strengthening in the pace of the recovery. Fed officials meet on September 12-13, and investors will look to a speech by Fed Chairman Ben Bernanke at the central bank's high-profile gathering in Jackson Hole, Wyoming, at the end of next week for clues on the monetary policy course.
While businesses largely pulled back their horns in July, strong demand for civilian aircraft lifted overall orders for durable goods by 4.2 percent after a 1.6 percent increase in June. Last month's increase was the largest since December and beat economists' expectations for a 2.4 percent rise. Durable goods are items from toasters to tanks that are meant to last at least three years. Orders excluding transportation fell 0.4 percent, the second straight monthly decline.
Orders for transportation equipment jumped 14.1 percent, with demand for civilian aircraft surging 53.9 percent. Boeing received orders for 260 aircraft, up from 24 planes in June, according to information posted on the planemaker's website. United Airlines placed an order for 150 planes last month. Motors vehicles orders were also strong, rising by 12.8 percent, the most since July last year. Away from transportation, there were gains in new orders for primary metals, computers and electronic product. But new orders for fabricated metal products, electrical equipment and appliances and machinery fell.
While the orders backlog for core capital goods fell, the backlog for durable goods overall increased 0.8 percent due to the strong demand for aircraft. The inventory of unsold durable goods increased 0.7 percent. "Statistically, faster inventory growth may be a plus for GDP growth in the third quarter," said Michelle Girard, a senior economist at RBS in Stamford, Connecticut. "However, the combination of lower orders and rising stockpiles does not bode well for future production."
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