WASHINGTON (Reuters) – US spending on equipment seems to have stayed low in September, and the trade deficit continued to expand as rising imports surpassed the rebound in exports, suggesting modest growth in the third quarter.
US-made plywood is shown for sale in Los Angeles, California, USA, on April 26, 2017. REUTERS / Mike Blake
But last quarter's pace of growth was probably solid, with other data on Thursday in both wholesale and retail rising last month. A worsening labor market that continues to raise wage growth is also supporting the economy.
The Department of Commerce said orders for non-military capital goods excluding airplanes, a closely watched proxy for corporate spending plans, declined 0.1 percent last month, with demand for fabricated metals and electrical appliances, equipment and components slipping.
This was followed in August by a decline of so-called Core Capital Goods Order by 0.2 percent. Reuters analysts predicted that core capital goods orders rose 0.5% last month. Deliveries of core capital goods remained unchanged in September for a second month in a row.
Core capital shipments are used to calculate equipment expenditures in measuring the state's gross domestic product.
"It looks like the business has ordered all the new equipment they need now to meet the demand for their goods and services," said Chris Rupkey, chief economist at MUFG in New York. "The third quarter could prove to be a high-water mark for US manufacturing."
Enterprise equipment spending slows after growing rapidly for more than a year. It was supported by Trump's $ 1.5 trillion tax cut package, which included a drastic reduction in corporate tax rates.
But the effects of lower taxes are offset by the government's "America First" policy, which has led to a fierce trade war between the United States and China, and by tit-for-tat deals with other major trading partners.
Companies including Caterpillar Inc (CAT.N.), 3M Co (MMM.N) and Ford Motor Co (F.N) have complained about rising production costs due to tariffs on imported steel and other raw materials.
In its Beige Book report, released Wednesday, the Federal Reserve said, "Manufacturers reported that finished goods prices are rising out of necessity as the cost of commodities, such as metals, rises, which they attribute to tariffs."
Dollar .XXY rose against a currency basket after Mario Draghi, head of the European Central Bank, said that monetary union remains fragile and does not trigger concerns over Italian financial instability. Wall Street stocks traded higher as US Treasury prices fell.
In another report released on Thursday, the Commerce Department said the trade deficit had risen by 0.8 percent to $ 76.0 billion in September. Exports of goods rose $ 2.5 billion to $ 141.0 billion last month, helped by supplies of manufactured goods, automobiles, consumer goods and capital goods.
But food exports continued to decline, probably due to soybean shipments that bore the brunt of the Washington trade battle with Beijing.
Last month's rebound in commodity exports was surpassed by $ 3.1 billion in increased imports of goods to $ 217.0 billion. Imports of consumer and capital goods rose sharply, reflecting robust domestic demand.
The expected slowdown in GDP growth due to the worsening trade deficit is likely to be offset somewhat by an increase in inventory investment. The Commerce Department said wholesale inventories rose 0.3 percent last month. Retail inventories gained 0.1 percent.
"We continue to believe that trade will weigh heavily on growth in the third quarter and that stocks will be a significant boost," said Daniel Silver, an economist at JP Morgan in New York. "The major trade and stock swings between the second and third quarters are likely to be at least partly due to changes in trade policy."
According to a survey conducted by Reuters among economists, the economy is expected to grow by 3.3 percent annualized in the third quarter, after rising 4.2 percent in April-June. The government will publish its GDP growth data for the third quarter on Friday.
Thursday's third Labor Department report showed that initial claims for state unemployment benefit increased by 5,000 to a seasonally adjusted 215,000 in the week ended Oct. 20. In the week ended September 15, claims fell to 202,000, the lowest since November 1969.
The economists polled by Reuters forecasted a rise in claims to 214,000 last week. The four-week moving average of initial applications, which is considered to be a better measure of labor market development in week-to-week volatility, remained unchanged at 211,750 last week.
The labor market is considered close or full-time, with the unemployment rate close to a 49-year low of 3.7 percent. The economy has a record 7.14 million vacancies, indicating a shortage of skilled labor.
Reporting by Lucia Mutikani; Editing by Paul Simao