New orders for US-made capital goods unexpectedly fell for a second straight month in January and shipments barely rose, pointing to a slowdown in business spending on equipment and in economic growth early in the first quarter.
The moderation in growth was underscored by other data on Tuesday showing a widening in the goods trade deficit last month amid decreasing exports. The reports joined weak January retail sales, industrial production and home sales data in suggesting the economy lost momentum at the start of the year.
But overall economic activity remains supported by robust consumer confidence, which surged to a more than 17-year high in February. Rising house prices are also boosting household wealth, helping to underpin consumer spending. "Growth this year should be strong, maybe even in the 3 percent range, but to get there, current business and consumer spending patterns have to change," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.
Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, dropped 0.2 percent last month after declining 0.6 percent in December. That was the first back-to-back drop in these so-called core capital goods orders since May 2016. Economists polled by Reuters had forecast these orders rising 0.5 percent last month. Orders increased 8.0 percent on a year-on-year basis.
There were decreases in orders for machinery, primary metals and electrical equipment, appliances and components. Orders for computers and electronic products and fabricated metal products rose last month. Shipments of core capital goods edged up 0.1 percent after accelerating 0.7 percent in December. Core capital goods shipments are used to calculate equipment spending in the government's gross domestic product measurement.
Spending on equipment is slowing after robust growth in 2017, which was partly driven by expectations of hefty tax cuts from the Trump administration, which have since materialized. There is cautious optimism that companies will use some of their windfall from the $1.5 trillion tax cut package to boost productivity. The Trump administration slashed the corporate income tax rate to 21 percent from 35 percent effective January.
In another report on Tuesday, the Commerce Department said the goods trade deficit rose 3.0 percent to $74.4 billion in January. Exports of goods fell $3.1 billion to $133.9 billion. Goods imports slipped $0.9 billion to $208.3 billion. The department also said wholesale inventories increased 0.7 percent in January. Retail inventories rose 0.8 percent. The weak core capital goods orders and larger goods trade deficit will likely weigh on first-quarter GDP growth. However, some of the impact could be mitigated by the rise in inventories.
The Atlanta Fed cut its first-quarter GDP estimate by six-tenths of a percentage point to a 2.6 percent annualized rate. Growth estimates by Wall Street investment banks are as low as a 2.0 percent pace.
The economy grew at a 2.6 percent rate in the fourth quarter. Growth in the first quarter tends to be weak because of a seasonal quirk. In a third report, the Conference Board said its consumer confidence index increased 6.5 points to 130.8 this month, the highest reading since November 2000. The rise came despite recent stock market volatility and was largely driven by labour market optimism.
The survey's so-called labour market differential, derived from data about respondents who think jobs are hard to get and those who think jobs are plentiful, was the most favourable since January 2001. This measure, which closely correlates to the unemployment rate in the Labor Department's employment report, is pointing to further declines in the jobless rate and labour market slack. The unemployment rate is at a 17-year low of 4.1 percent.
Separately, the S&P CoreLogic Case-Shiller composite home price index of 20 US metropolitan areas rose 6.3 percent in December from a year ago after increasing 6.4 percent in November. Prices in the 20 cities advanced 0.6 percent in December from November on a seasonally adjusted basis. In a fifth report the Federal Housing Finance Agency said its house price index rose 6.5 percent in the 12 months through December.
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