Political Economy: Durable goods orders rise a disappointing 0.3 percent

By Neil Irwin
Wednesday, August 25, 2010; 10:57 AM

Spending on big-ticket items rose less than expected in July, a sign that one of the areas of economic strength over the first half of the year -- business investment in equipment -- is starting to fade.

Overall, orders for durable goods rose 0.3 percent, the Commerce Department said Wednesday, well below the 3 percent that analysts had expected. But even that slight rise was driven by a spike in aircraft orders, a volatile category. Excluding transportation, durable goods orders fell 3.8 percent.

Most worrisome, orders for non-defense capital goods excluding aircraft fell 8 percent. That indicator tends to predict future equipment spending by businesses, Business spending on equipment and software rose at more than a 20 percent annual rate in the first half of 2010, one of the bright spots in the economic picture; the new data suggest that such spending may not be as strong in the second half of the year.

"All in all, today's report represents a very soft start to Q3," said Theresa Chen, an economist at Barclays Capital, in a report.

Much of the business spending appears to have been playing catch-up, replacing equipment that had grown obsolete or worn out but which firms had delayed replacing during the deep recession in 2009. As that cycle of replacing equipment ends, equipment and software spending, a component of gross domestic product, could suffer further.

The disappointing data on durable goods is only the latest in a series of negative reports about the economy. Existing home sales fell 27 percent in July, and there were more new jobless claims in the most recent report than any week since November.

On Friday, the government will revise its estimate of second quarter GDP growth, which is expected to show that the U.S. economy grew at only a 1.4 percent pace, worse than the 2.4 percent originally estimated.

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