U.S. Business Investment Outlook

By Lucia Mutikani

WASHINGTON (Reuters) – New U.S. orders for key manufactured capital goods saw a stronger than expected increase in December. However, business spending on equipment appears muted for Q4 due to a Boeing strike that disrupted aircraft deliveries.

The Commerce Department’s report released on Tuesday indicated that business investment in equipment is likely to rise in Q1 2024. Potential boosts to spending may arise from President Trump’s administration focusing on tax cuts and deregulation, although tariffs on imports could present challenges.

Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets, stated, “I have penciled in a substantial drop in business investment in equipment for the fourth quarter … driven… by the Boeing strike.” He expressed confidence that businesses would eventually invest robustly, likely after mid-year.

Non-defense capital goods orders, excluding aircraft, a significant indicator of business spending plans, rose by 0.5% following a revised 0.9% increase in November. Economists had anticipated a 0.3% rise. Year-on-year, core capital goods orders increased by 0.6%.

Breakdown of orders showed:
– Machinery: +0.2%
– Electrical equipment, appliances and components: +0.3%
– Computers and electronic products: +0.1%
– Fabricated metal products: +1.2%
– Primary metals: -0.6%

Shipments of core capital goods rose 0.6% after a 0.4% increase in the previous month.

Impact of Boeing Strike
Orders for non-defense capital goods dropped 7.8% last month after a 3.2% decline in November. Shipment figures rose 3.5% after a previous decrease of 0.9%. These figures are crucial for estimating the business spending component in the GDP report. The Boeing strike, which lasted from mid-September to early November, heavily impacted aircraft production and delivery.

Despite disruptions from the strike, strong aircraft deliveries buoyed business spending during Q2 and Q3, although rising interest rates tempered manufacturing output.

Economists believe business spending contributed neutrally to GDP growth last quarter. A government report will provide the Q4 GDP growth estimate shortly, with predictions indicating a 2.6% annualized increase.

In contrast, the economy expanded at a 3.1% pace in Q3, significantly above the Federal Reserve’s target non-inflationary growth rate of 1.8%.

The Fed is expected to maintain its benchmark overnight interest rate between 4.25%-4.50% after a two-day policy meeting on Wednesday, marking a total rate cut of 100 basis points since September.

Trump’s election victory in November has improved business sentiment with hopes of tax cuts and a more lenient regulatory landscape. However, his proposed immigration and trade policies have raised inflation concerns, which may restrict the Fed’s capacity to cut rates in 2024.

Transportation equipment orders saw a decrease of 7.4%, largely due to a 45.7% fall in commercial aircraft orders. Boeing reported receiving 142 orders in December, up from 49 in November, concentrated on the 737 MAX. Motor vehicles and parts orders fell by 0.2%.

Overall, durable goods orders, which include items such as toasters and aircraft designed to last three years or more, dropped by 2.2% after a 2.0% decrease in November.

Carl Weinberg, chief economist at High Frequency Economics, noted mixed perceptions regarding Trump’s return to office. “For others, however, the return of President Trump to office is a positive change in the investment environment. There is some talk in the markets that companies may have accelerated investment projects to beat imminent tariffs on imported goods after the Trump inauguration.”