U.S. core capital goods orders drop; business spending strong

WASHINGTON (Reuters) - New orders for key U.S.-made capital goods unexpectedly fell in October after three straight months of hefty gains, but a sustained increase in shipments pointed to robust business investment and economic momentum as the year winds down.

The economy's prospects were bolstered by other data on Wednesday showing a decline in the number of Americans filing claims for unemployment benefits. Strong business investment and tightening labor market conditions will likely keep the Federal Reserve on track to raise interest rates next month.

"Fed policymakers will likely be impressed with the positive overall trend of business investment in equipment this year," said Chris Rupkey, chief economist at MUFG in New York. "Interest rates do not need to be left at such low levels if the goal is to further business investment."

The Commerce Department on Wednesday said orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, declined 0.5 percent last month. That was the biggest drop since September 2016 and followed an upwardly revised 2.1 percent increase in September.

Orders of these so-called core capital goods increased at a 14.5 percent annualized pace in the three months prior to October, the strongest since June 2013. Economists had forecast orders of core capital goods increasing 0.5 percent last month after a previously reported 1.7 percent jump in September. Core capital goods orders rose 4.4 percent on a year-on-year basis.

Shipments of core capital goods advanced 0.4 percent last month after accelerating by 1.2 percent in September, pushing the annualized three-month pace to 13.1 percent. Core capital goods shipments are used to calculate equipment spending in the government's gross domestic product measurement.

"The solid trend for the shipments data through October suggests that the fourth quarter will be another strong quarter for equipment spending," said Daniel Silver, an economist at JPMorgan in New York. "We see some upside risk to our real GDP growth forecast for the fourth quarter."

Prices for U.S. Treasuries rose marginally in thin trading ahead of Thursday's Thanksgiving holiday. The dollar <.dxy> fell against a basket of currencies. Stocks on Wall Street were little changed near record highs as a retreat in technology stocks was offset by a jump in crude prices.

Core capital goods shipments have been increasing since February, in part fueled by expectations that President Donald Trump and his fellow Republicans in Congress will push through hefty corporate tax cuts.

Republicans in the House of Representatives last week approved a broad package of tax cuts, including an immediate reduction in the corporate income tax rate to 20 percent from 35 percent. Their colleagues in the Senate are advancing their own tax bill, which would also lower corporate taxes by the same rate but delay the reduction by one year.

TIGHTENING LABOR MARKET

Business spending on equipment has buoyed economic growth for the past four quarters and is expected to make a solid contribution to GDP in the October-December period. The economy grew at a 3.0 percent annualized rate in the third quarter.

Growth estimates for the fourth quarter range from as low as a 2.5 percent pace to as high as a 3.4 percent rate.

"With the passage of a corporate tax cut becoming more possible, the likelihood is that future business capital spending should be strong," said Joel Naroff, chief economist at Naroff Economic Advisors, in Holland, Pennsylvania.

Strong business spending on equipment is helping to boost manufacturing, which accounts for about 12 percent of the U.S. economy. Last month, there were increases in orders for machinery, electrical equipment, appliances and components, primary metals and computers and electronic products.

Overall orders for durable goods, items ranging from toasters to aircraft meant to last three years or more, fell 1.2 percent last month as demand for transportation equipment tumbled 4.3 percent. Durable goods orders increased 2.2 percent in September.

In a separate report on Wednesday, the Labor Department said initial claims for state unemployment benefits declined 13,000 to a seasonally adjusted 239,000 for the week ended Nov. 18, reversing the prior week's increase.

Claims had risen in recent weeks as a backlog of applications from Puerto Rico was processed following repairs to infrastructure damaged by Hurricanes Irma and Maria.

Last week marked the 142nd straight week that claims remained below the 300,000 threshold, which is associated with a strong labor market. That is the longest such stretch since 1970, when the labor market was smaller.

The labor market is near full employment, with the jobless rate at a 17-year low of 4.1 percent. The four-week moving average of initial claims, considered a better measure of labor market trends as it irons out week-to-week volatility, rose 1,250 to 239,750 last week.

The claims data covered the survey period for the non-farm payrolls component of November's employment report. The four-week average of claims fell 8,750 between the October and November survey weeks, suggesting steady job growth this month.

The economy created 261,000 jobs in October, a large chunk of which reflected a recovery after workers in Texas and Florida were temporarily displaced by hurricanes. Non-farm payrolls increased by only 18,000 in September.

(Reporting by Lucia Mutikani; Editing by Paul Simao)