Orders signal slowdown in U.S. business spending

A slump in June orders for equipment such as computers and machinery signals U.S. business investment will probably cool in the second half of the year and contribute less to the economic expansion.

Bookings for non-defense capital goods excluding aircraft, a proxy for future corporate spending, dropped 1.4%, the third decrease in the past four months, according to Commerce Department data issued today (July 26) in Washington. Another report showed claims for unemployment benefits declined more than forecast last week, which may have resulted from difficulty adjusting data for seasonal shutdowns of auto factories.

Softening overseas demand, slowing U.S. consumer spending and gridlock in Washington over fiscal policy may prompt businesses to put off replacing old equipment, hurting profits at companies like Xerox Corp. A report tomorrow is projected to show the world’s largest economy expanded in the second quarter at the weakest pace in a year.

“Business investment has definitely shifted lower,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC in New York. The European debt crisis and fiscal cliff “will put downward pressure on orders, which will translate into weaker growth in the U.S.”

The U.S. Commerce Department’s report showed total orders for durable goods, those meant to last at least three years, climbed 1.6% for a second month, exceeding the median forecast of economists surveyed by Bloomberg News that called for a 0.3% gain. The increase was paced by bookings for civilian aircraft and military hardware that are often volatile.

Orders excluding the volatile transportation category unexpectedly dropped 1.1% in June, the most in five months. Demand for computers and communications equipment slumped 4.9% last month, while orders for machinery decreased 1.1%.

Bookings for non-military capital goods excluding aircraft fell at a 3.1% annual rate in the second quarter, the first decrease since the same period in 2009, when the U.S. was still in a recession.

“Global activity has shifted lower,” said Porcelli, who correctly projected the gain in total orders. “It is difficult for demand to gather much momentum at this stage.”

The report contained better news for estimates of business investment last quarter.

Shipments of non-military capital goods excluding aircraft, used in calculating gross domestic product, increased 1.2% in June after rising 1.1% the prior month.

“The strength in underlying shipments bodes well for business investment in Q2, although the weakness of orders suggests that firms have become more uncertain about the outlook for demand,” Peter Newland, an economist at Barclays Capital in New York, said in a note to clients.

The economy grew at a 1.4% annual rate, down from a 1.9% rate in the first quarter, economists forecast a Commerce Department report tomorrow will show, according to the median estimate in a Bloomberg survey. Consumer spending probably rose at a 1.3% pace following a 2.5% gain in the first three months of the year.

Stocks jumped today as European Central Bank President Mario Draghi said the central bank will do whatever it takes to preserve the euro. The Standard & Poor’s 500 Index climbed 1.7% to 1,360.02 at the close in New York. Treasury securities fell, sending the yield on the benchmark 10-year note up to 1.43% from 1.40% late yesterday.