Business spending on equipment eked out a slight gain in July in what was a disappointing start for the investment component of the economy in the third quarter. Jobless claims, however, defied expectations again, dropping last week to the lowest level in August.
Jobless claims defied expectations again, dropping to 230,000.
Orders for capital goods that exclude defense and aircraft—a proxy for future business spending—rose by 0.1% on the month, according to Commerce Department data released Thursday. That followed a downward revision in June that reduced a 0.1% gain to a 0.4% decline.
Shipments in the same category fell by 0.2%, a back-to-back decline on a monthly basis. June’s number was also revised down to a 0.1% decline from a 0.1% increase.
Together with defense and aircraft orders, total orders for durable goods fell by 5.2% in July, a lot steeper than the market forecast of a 4.0% decline.
Aircraft orders plunged by 43.6% in July after soaring in May and June. While aircraft orders are often volatile, the drop in one of the most important components in manufacturing will push down total investment growth for the third quarter.
Inside the data, orders for computers and electronics were the only category that fell besides aircraft, declining by 0.1% after surging by 1.2% in June. For shipments, primary metals equipment was the only category that registered a decline besides aircraft, falling by 0.3%.
Read more of RSM’s insights on economic headwinds and the middle market.
Looking ahead, we expect a bumpy road for business spending as real interest rates stay highly restrictive. Outside of artificial intelligence investment, it is quite hard for other sectors to replicate the type of spending that we saw in the past year and a half.
If a recession takes place, it would be led by a drop in the investment component, making the order and shipment data of durable goods the key data to watch in the next couple of months.
New filings for jobless claims fell by 4.2% last week to 230,000, keeping the four-week moving average between 230,000 and 240,000, according Labor Department data released Thursday.
Compared to our recession alert threshold of 250,000, new jobless claims have continued to point to a solid labor market where layoffs stay under control.
We do not expect layoffs to increase materially in the last weeks of the summer. There are, however, reasons to be concerned once we head into the year-end shopping season, when spending power is expected to face a lot more headwinds.