Demand for U.S. business equipment unexpectedlyincreased in October by the most since the start of the year, a respite from a capital-spending downturn that weighed on third-quarter economic growth.
(Bloomberg) --
Bookings for commercial equipment excluding aircraft -- a proxy for business investment -- rose 1.2% following two straight declines, while shipments advanced 0.8%, according to the Commerce Department. Those were both the largest gains since January and compared with analyst projections for declines.
Other government data on Wednesday showed that gross domestic product expanded an annualized 2.1% in the third quarter, better than the initially reported 1.9% and the prior period's 2%, while weekly filings for unemployment benefits fell by the most since May.
While the GDP figure suggests the economy is a bit healthier than thought, the revision largely reflected more inventory accumulation, and economists project moderation in fourth-quarter growth. In addition, jobless claims tend to be volatile around the year-end holidays, partly because of difficulties adjusting for seasonal swings.
Consumers were the economy’s torch-bearer last quarter, with modest help from residential construction, while U.S. companies trimmed capital spending budgets in response to weaker global demand exacerbated by the U.S.-China trade war. A report later Wednesday morning is forecast to show inflation-adjusted household spending was little changed at the start of the fourth quarter and ahead of the all-important holiday-shopping season.
So far, consumers have benefited from a still-solid job market. The Labor Department said applications for unemployment benefits fell by 15,000 last week to a three-week low of 213,000, following a five-month high the prior week. The median estimate of economists was for a drop to 221,000.
Federal Reserve officials decided at each of their last three policy meetings to reduce the benchmark lending rate target as a way of insuring the economy against a broader slowdown that threatens to extend beyond the pullback in capital spending. Policy makers have indicated they will hold rates steady for some time unless there's a significant shift in the outlook.
Corporate Profits
The GDP report included the government’s first read on corporate earnings for the quarter. Pre-tax profits increased 0.2% from the prior three months and fell 0.8% from a year ago. That reflected a $6 billion reduction from legal settlements with Facebook (NASDAQ:FB) and Google (NASDAQ:GOOGL), according to the Commerce Department. Even excluding that effect, though, the pace of earnings increases was still relatively modest.
Inventory investment added 0.17 percentage point to the pace of GDP growth in the third quarter, according to the data, revised from an initially reported drag of 0.05 point.
Business fixed investment in equipment, structures and software decreased an annualized 2.7% in the third quarter, revised from an initially estimated decline of 3%. Nonresidential investment subtracted 0.36 percentage point from growth, the most since the final three months of 2015.
While the Commerce Department’s durable goods report showed a monthly increase in shipments of non-military capital goods excluding aircraft, used in the calculation of GDP, orders were down slightly on a year-over-year basis. The outlook for investment will probably depend on a resolution to U.S.-China trade tensions and whether export markets begin to recover.
The broader gauge of orders for all durable goods climbed 0.6% in October, compared with estimates for a 0.9% drop. Bookings excluding transportation equipment also increased 0.6%.
Consumer Spending
Personal consumption was the economy’s bright spot in the third quarter, climbing at an annualized 2.9% rate, unrevised from the initial estimate, which followed a 4.6% surge in the previous three months. Considering the uncertainty over business spending, the economy’s performance in the fourth quarter will likely again be determined by the pace of consumer outlays.
An uninspiring advance in October retail sales showed spending got off to a modest start in the fourth quarter. Purchases of merchandise account for about a third of all consumer spending, while services make up the rest.
In addition to the consumer spending figures, Wednesday will also see the release of October data on pending home sales, as well as the Fed's anecdotal Beige Book survey of business conditions across the central bank's 12 regions.
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