US business spending data raises rate hike expectations

WASHINGTON • New orders for key US-made capital goods rose more than expected last month and shipments rebounded, pointing to a moderate pickup in business spending on equipment after slowing down at the end of the first quarter.

The report from the Commerce Department late last Friday added to data on consumer spending in suggesting momentum in the economy. That bolsters expectations that the Federal Reserve will raise interest rates next month.

The US central bank increased borrowing costs in March and forecast at least two more rate hikes for this year.

"Business investment spending is solid enough to keep the Federal Reserve on the gradual path of interest rate hikes," said MUFG chief economist Chris Rupkey in New York. "The economy is firing on cylinders this quarter with both consumers and business investment adding to the mix on economic growth."

Orders for non-defence capital goods excluding aircraft, a closely watched proxy for business spending plans, jumped 1 per cent last month. The increase in the so-called core capital goods orders reversed March's 0.9 per cent drop.

Core capital goods orders increased 6.6 per cent on a year-on-year basis.

Shipments of core capital goods rose 0.8 per cent last month after falling 0.7 per cent in March. Core capital goods shipments are used to calculate equipment spending in the government's gross domestic product measurement.

Business spending on equipment slowed in the first quarter after double-digit growth in the second half of last year. Moderate growth is expected in the second quarter.

A separate report from the University of Michigan last Friday showed its consumer sentiment index slipped to a reading of 98 this month from 98.8 in April. While consumers were upbeat about the labour market, they expected smaller income gains than a month or year ago. They also expected inflation and interest rates to rise in the year ahead.

Though the correlation between consumer sentiment and consumer spending has weakened, worries about income together with rising borrowing costs and prices could restrain consumer spending in the coming months.

"There appears to be some emerging scepticism about whether or not wage gains will actually increase enough to offset expected inflationary pressures and rising interest rates, despite an expectation of continued job market strength," said Mr Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan.


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A version of this article appeared in the print edition of The Straits Times on May 28, 2018, with the headline US business spending data raises rate hike expectations. Subscribe