U.S. durable goods orders rebound

In another positive sign for the U.S. economy, durable goods orders rose last month, boosted by business investment, despite a reduction in the investment tax credit.

Overall, durable goods rose 2.2% in February after a steep decline in January, according to the Commerce Department. Greater demand for machinery, computers, autos and aircraft drove much of the increase.

Orders for core capital goods, a good measure of business investment plans, rose 1.2%. Demand for these goods fell in January by the most in a year, after the full tax credit expired. Orders can fluctuate sharply from month to month. Still, orders have been steadily rising since the recession ended nearly three years ago.

In February, durable goods orders totalled $211.8 billion, 42% above the recession low. Orders remain roughly 14% below their peak in December 2007.

The increase in February disappointed some economists, who had hoped to see a bigger gain in orders.

“So far, demand for consumer and business goods is showing resilience in the face of higher gasoline prices,” writes Paul Edelstein, director of financial economics, IHS Global Insight. “This is particularly apparent in motor vehicles orders, which have increased in each of the last three months. Orders might still fall in March, but pent-up demand for new cars and trucks may ultimately drive orders higher.

Edelstein notes that order growth was widespread beyond the transportation sector, with orders for communications equipment rising 11.2%, computers 6.6% and primary metals 1.3%.

“The implication is that demand for consumer goods and business equipment remained robust last month,” he writes. “The impact of today’s data on Q1 real GDP growth estimates is minimal, but very slightly negative. It supports a tracking rate of just below 2%, with business equipment spending growth expected to be a little higher than 7%.”

Last year, businesses could reduce their taxable profits by an amount equal to the cost of a major investment. That credit fueled a jump in orders for industrial machinery, computers and other capital goods. Spending on core capital goods surged nearly 3% to an all-time high in December.

The credit this year lets companies write off only half the cost. Many economists believe that change was a big reason for the January drop off in durable goods and core capital goods.

Shipments of core capital goods rose in February. But they are still below December’s total. As a result, business investment in equipment and software isn’t much higher than it was in the final three months of last year, Ashworth noted. That’s a big reason economists expect economic growth to slow to about a 2% annual pace in the current quarter, down from 3% in the final three months of last year.

Still, business investment is expected to stay strong this year. Surveys show that business spending should increase in the April-June quarter, Ashworth said. Many companies delayed upgrading their facilities during the recession and are starting to catch up.

A vibrant manufacturing sector has helped drive the best job growth in two years. The economy has added an average of 245,000 jobs per month since December, which has lowered the unemployment rate to 8.3%. Manufacturers have added an average of 37,000 jobs per month during that time.