By Lucia Mutikani
WASHINGTON, Oct 27 (Reuters) – New orders for key US-manufactured capital goods increased in September and shipments of these products surged, suggesting business spending on equipment maintained a robust growth pace in the third quarter, though doubts are mounting over the huge cost of building out AI infrastructure.
The upbeat report from the Commerce Department on Tuesday reinforced economists’ expectations that the economy grew strongly in the third quarter. The government is scheduled to publish its advance estimate of gross domestic product for the July-September period on Thursday.
“There is an investment boom and not everyone in America is participating in it, but the equipment expenditures will continue and economic growth will likely have a 3% handle on it for the foreseeable future,” said Christopher Rupkey, chief economist at FWDBONDS.
Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, rose 0.5% last month after an unrevised 1.6% jump in August, the Commerce Department’s Census Bureau said.
Economists polled by Reuters had forecast these so-called core capital goods orders would advance by 0.7%. Core capital goods orders advanced 10.9% year-on-year in September.
Shipments of core capital goods, which go into the calculation of the business spending on equipment component in the gross domestic product report, vaulted 1.2% last month after gaining 0.6% in August. Shipments of core capital goods increased 8.8% year-on-year in September.
STRONG THIRD-QUARTER GDP GROWTH ANTICIPATED
Overall non-defense capital goods orders accelerated 6.2%, and shipments increased 1.7%. Economists estimated that business spending on equipment grew at a roughly 20% annualized rate last quarter. That would mark a third straight quarter of double-digit growth. Economists forecast the economy grew at more than a 3.0% rate in the third quarter.
The AI-driven spending boom is helping to underpin manufacturing and the overall economy, blunting the hit from the dragging-on Middle East conflict, which is snarling supply chains and driving up commodity prices, including for energy products.
But investors are increasingly focusing on the rising costs of long-term projects in which the payoff is uncertain. Tech firms have borrowed huge sums over the past year for AI spending, a potential downside risk to equipment spending.
Economists also see the boost from last year’s tax incentives fading in 2027. Tighter financial conditions amid rising inflation because of the US-Israeli war with Iran were also seen imposing some drag.
The Federal Reserve raised its benchmark overnight interest rate to the 3.75%-4.00% range last month, but was expected to keep borrowing costs unchanged on Wednesday.
“Survey measures of capex intentions, however, also suggest that core equipment investment will lose momentum ahead, with a slowdown especially likely if the recent surge in borrowing costs is sustained,” said Oliver Allen, senior US economist at Pantheon Macroeconomics.
Orders for durable goods, items ranging from toasters to aircraft that are meant to last three years or more, advanced 1.8% in September after edging up 0.1% in August. They increased 8.0% year-on-year in September. Durable goods were boosted over the month by a 4.6% jump in transportation equipment orders.
Motor vehicles and parts orders rose 0.3%, while the volatile civilian aircraft orders component soared 28.4%. Boeing reported on its website that it had received 165 orders for aircraft, a surge from only 15 in August.
(Reporting by Lucia Mutikani; Editing by Paul Simao, Chizu Nomiyama and Andrea Ricci )
