Ominous Business Indicator, Machinery Orders Soft

Ominous Business Indicator, Machinery Orders Soft

$DIA, $SPY, $QQQ, $VXX

US business spending intentions weakened in April for a 3rd month running on soft demand for machinery, but a surge in contracts to purchase previously owned homes to a 10-year high supported views economic growth was gaining speed.

The growth picture was further boosted by another report Thursday showing the number of Americans seeking unemployment benefits fell more than expected last week, pushing them back to near cycle lows.

“Overall domestic growth momentum appears to be on the mend. Nevertheless, the weak performance in business capital investment activity suggests that this segment remains a source of drag for the US economic recovery,” said the Deputy Chief economist at TD Securities in New York.

The US Commerce Department said orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, fell 0.8% after slipping 0.1% the prior month. These so-called core capital goods orders have now declined for 3 consecutive months.

Economists polled had forecast core capital goods orders increasing 0.4% last month.

The persistent decline in these orders comes as the manufacturing sector remains pressured by lower energy prices, which have eroded profits of energy companies and forced oilfield services firms like Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL) to slash capital spending budgets.

Manufacturing, which accounts for 12% of the US economy, has also taken a hit from efforts by businesses to slim down an inventory bloat, which has undercut new orders growth.

A strong USD has been a drag on exports.

Shipments of core capital goods used to calculate equipment spending in the gross domestic product report rose 0.3% last month, reversing March’s 0.3% fall.

Much of the factory sector weakness has been concentrated in the heavy machinery segment, where manufacturers have also been hurt by reduced demand for agricultural equipment.

In April, orders for machinery tumbled 1.9% after dropping 0.8% in March.

The National Association of Realtors (NAR) said its pending home sales index jumped 5.1% last month to its highest level since February 2006. Pending home contracts become sales after a month or q, and April’s surge pointed to further gains in home resales.

The housing market is being underpinned by a tightening labor market, which is starting to lift wages, as well as still very low mortgage rates. But a shortage of properties available for sale remains a hurdle and house prices have risen faster than wages, sidelining some 1st-time buyers.

A 3rd report from the US Labor Department showed initial claims for state unemployment benefits declined 10,000 to a seasonally adjusted 268,000 for the week ended 21 May.

The pending homes sales and jobless claims data joined reports on retail sales, housing and industrial production in suggesting the economy was gaining steam after growth slowed to a 0.5% annual pace in Q-1.

The US Federal Reserve Bank of Atlanta is currently estimating Q-2 GDP growth at a 2.9% rate.

Despite the persistent weakness in business spending, the steady stream of mostly upbeat reports could give the US Fed the ammo it needs to raise interest rates in June or  July

The US Commerce Department report also showed orders for durable goods, items ranging from toasters to aircraft meant to last 3 years or more, jumped 3.4% last month after increasing 1.9% in March.

The rise in durable goods orders last month was led by an 8.9% rise in bookings for transportation equipment. Orders for civilian aircraft soared 64.9%. There were increases in orders for motor vehicles, fabricated metal products, computers and electronic goods, and electrical equipment, appliances and components.

Durable goods inventories declined further in April, a good sign for the manufacturing’s future business prospects, while unfilled orders increased 0.6%. Durable goods shipments rose 0.6% following 2 consecutive months of decliners.

Thursday, the US major stock market indexes finished at: DJIA -24.59 at 17826.92, NAS Comp +6.88 at 4901.77,  S&P 500 -0.47 at 2090.07

Volume: Trade was light with about 722-M/shares exchanged on the NYSE

• DJIA +2.3% YTD
• S&P 500 +2.3% YTD
• Russell 2000 +0.4% YTD
• NAS Comp -2.1% YTD

Stay tuned…

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