Demand for US capital goods records biggest drop in 8 months

Demand for US-made capital goods recorded its biggest drop in eight months in September and the pace of house price gains moderated in August, suggesting some cooling in economic growth in the third quarter.

The economy, however, remains on solid ground as other data today showed consumer confidence jumped to a seven-year high in October. "The weak capital goods orders and house price data confirm the slowdown in activity, but the burst in consumer confidence suggests that US households are very optimistic about the outlook for the economy," said Millan Mulraine, deputy chief economist at TD Securities in New York.

Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, fell 1.7 per cent last month, the Commerce Department said. That was the largest drop in the so-called core capital goods since January of this year, and it followed a 0.3 per cent increase in August.

Economists had expected a 0.6 per cent gain. Some blamed the weakness on slowing growth in China and the euro zone. "This relatively weak finish to the third quarter is no reason to sound the alarm just yet," said Tim Quinlan, an economist at Wells Fargo Securities in Charlotte, North Carolina.

A second report showed the S&P/Case-Shiller composite index of 20 metropolitan areas gained 5.6 per cent in August over last year, the slowest year-on-year increase since November 2012. It was another sign the housing sector continues to muddle along.

Separately, the Conference Board said its index of consumer attitudes increased to 94.5 this month, the highest reading since October 2007, from 89.0 in September. Households were upbeat about the labor market. The strong confidence reading and healthy corporate earnings boosted US stocks.

Prices for US Treasury debt were trading lower, while the dollar fell against a basket of currencies.

With core capital goods declining, overall orders for durable goods - items ranging from toasters to aircraft that are meant to last three years or more - fell 1.3 percent in September. It was the second straight month of declines after August’s 18.3 percent tumble.

Durable goods orders have been volatile in recent months because of big swings in aircraft orders. Last month, transportation orders fell 3.7 per cent as aircraft orders surprisingly dropped 16.1 per cent. Boeing recently reported on its website that it had received 122 orders last month, up from 107 in August. Automobile orders dipped 0.1 per cent in September.

Apart from transportation, other categories in the report were mixed. Orders for primary metals and electrical equipment, appliances and components rose, while demand for machinery and computers and electronic products fell.

Core capital goods shipments slipped 0.2 per cent last month after a 0.1 per cent gain in August. Shipments of these goods are used to calculate equipment spending in the government’s gross domestic product measurement.

The weakness in core capital goods shipments led some analysts to expect a slightly less robust pace of business spending in the third quarter.

The government’s advance GDP estimate on Thursday is expected to show the economy expanded at a 3 per cent annual pace in the third quarter after the second quarter’s robust 4.6 per cent rate. In a sign of strength in the manufacturing sector, unfilled orders of core capital goods increased 0.6 per cent in September. Core capital goods inventories, which have been rising moderately in the third quarter, gained only 0.3 per cent.