New orders for key U.S.-manufactured capital goods plunged by the most in six months in April amid mounting uncertainty over the economy because of tariffs, suggesting business spending on equipment weakened at the start of the second quarter.
The report from the Commerce Department on Tuesday also showed shipments of these goods falling last month. Economists said President Donald Trump's flip-flopping on import duties was making it difficult for businesses to plan ahead. That has been evident in the deterioration in sentiment among businesses.
"I have predicted for months that business investment will be the main driver of a softer economic performance this year, as executives postpone their capital projects until they have more clarity on policy," said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets. "These data offer the first confirming evidence of that hypothesis."
Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, tumbled 1.3% last month. That was the largest drop since last October and followed an upwardly revised 0.3% gain in March, the Commerce Department's Census Bureau said. Economists polled by Reuters had forecast these so-called core capital goods orders dipping 0.1% after a previously reported 0.2% drop in March.
Core capital goods shipments slipped 0.1% after increasing 0.5% in March. Nondefense capital goods orders slumped 19.1%. Shipments of these goods rebounded 3.5% after falling 1.1% in March. Front-running by businesses eager to avoid higher prices from Trump's sweeping tariffs on imports contributed to business spending on equipment, mostly information processing equipment, surging at its fastest rate in 4-1/2 years in the first quarter.
That helped to limit the drag on gross domestic product from a flood of imports. Trump has delayed higher import duties on most countries until July. The White House this month announced a deal with Beijing to slash tariffs on Chinese goods to 30% from 145% for 90 days.
The truce in the trade war between Washington and Beijing helped to lift consumer confidence in May after deteriorating for five straight months. Consumers, however, continued to worry about tariffs raising prices and hurting the economy.
The Conference Board's consumer confidence index increased 12.3 points to 98.0 this month, blowing past economists' expectations for an improvement to 87.0.
But concerns about the labor market lingered, even as consumers planned to spend more over the next six months on big-ticket items such as motor vehicles and household appliances, take vacations and buy houses.
The survey's so-called labor market differential, derived from data on respondents' views on whether jobs are plentiful or hard to get, narrowed to 13.2 from 13.7 in April. This measure correlates with the unemployment rate in the Labor Department's monthly employment report.
Trump last week ratcheted up his trade war, proposing a 50% tariff on European Union goods starting June 1 and threatened Apple AAPL.O with a 25% duty on any iPhones manufactured outside the United States. Trump at the weekend, however, backed off his threat against the EU, restoring a July 9 deadline.
Stocks on Wall Street were trading higher. The dollar rose against a basket of currencies. U.S. Treasury yields fell.
FRESH ROUND OF FRONT-LOADING
Economists are anticipating a period of volatility for business spending, with the pauses in higher tariffs for Chinese and EU products seen unleashing a fresh round of front-loading. Ultimately, they expect investment to soften this year.
Trump sees tariffs as a tool to, among other things, revive a long-declining U.S. industrial base, a feat that economists argue would be difficult to achieve in the short-term because of structural issues, including labor shortages.
While orders for computers and electronic products rebounded 1.0% last month, bookings for communications equipment decreased 2.6%. Electrical equipment, appliances and components orders fell 0.2%. But orders for machinery increased 0.8% as did those for fabricated metal products.
Orders for durable goods, items ranging from toasters to aircraft meant to last three years or more, dropped 6.3% last month after a slightly upwardly revised 7.6% rise in March.
Durable goods orders were previously reported to have jumped 7.5% in March. They were last month weighed down by a decline in orders for commercial aircraft as well as the fading boost from the tariff-related front-running.
Boeing BA.N reported on its website that it had received only eight aircraft orders in April, down from 192 in March. Orders for motor vehicles and parts decreased 2.9%.
Overall transportation orders plummeted 17.1% after soaring 23.5% in March. The Atlanta Federal Reserve lowered its second-quarter GDP growth estimate to a 2.2% annualized rate on the data from a 2.4% pace earlier. The economy contracted at a 0.3% rate in the January-March quarter.
Some economists expect business spending on equipment to hold up if companies more or less maintain the first quarter's robust pace of front-running of imports.
"It is not until this import-driven boost fades later this year that we expect investment growth in that category to slow sharply," said Thomas Ryan, an economist at Capital Economics. "We expect business equipment investment to flatline in the second half of the year."
The tariff-driven economic uncertainty and higher mortgage rates are weighing on demand for homes, resulting in a rise in supply that is curbing house price growth. New housing inventory is at levels last seen in 2007, while the supply of previously owned homes is the highest in more than four years.
A third report from the Federal Housing Finance Agency showed house prices increased 3.7% in the 12 months through March after advancing 3.9% in February.
"Prospects for house prices do not look strong," said Carl Weinberg, chief economist at High Frequency Economics. "A new slowing trend is emerging as the economy slows and real incomes falter."
(Reuters/Reporting by Lucia Mutikani; Editing by Andrea Ricci)
