VOL. 127 | NO. 210 | Friday, October 26, 2012
Weak Business Spending Drags on US Growth
CHRISTOPHER S. RUGABER and MARTIN CRUTSINGER | AP Economics Writers
WASHINGTON (AP) — Companies are holding off on purchases of computers, industrial equipment and other long-lasting manufactured goods, a trend that's slowing the U.S. economy.
A fourth straight month of lackluster corporate spending led many economists on Thursday to trim their forecasts for growth in the July-September quarter. The government will issue its first estimate of third-quarter growth Friday, the last snapshot of the overall economic activity before the presidential election.
The troubling report on business confidence overshadowed a drop in applications for unemployment aid and a slight increase in the number of people who signing contracts to buy homes.
Orders for durable goods, products expected to last at least three years, rose 9.9 percent in September, the Commerce Department said. But most of the increase was driven by a spike in aircraft orders, which are volatile and plummeted in the previous month.
Economists pay closer attention to core capital goods, which include machinery and computers but exclude aircraft. Those orders were unchanged in September after only a slight gain in August and steep declines in July and June.
And shipments of those goods fell for the third straight month. That means business spending on equipment and software likely declined 4.9 percent in the July-September quarter, economists noted. It would represent the first drop in that category since the recession.
Corporate investment helped the U.S. economy emerge from the Great Recession three years ago. But businesses have grown more cautious since spring, seeing tepid growth in consumer spending and declines in exports.
Many companies are worried that their overseas sales could dampen further if recession spreads throughout Europe, as some predict, and growth continues to slow in China, India and other developing countries.
Businesses also fear large tax increases and big government spending cuts that will kick in next year if Congress fails to reach a budget deal to avert them.
The disappointing report on durable goods led several economists to downgrade their forecasts for third-quarter economic growth. Michael Feroli, an economist at JPMorgan Chase, lowered his forecast to an annual rate of 1.6 percent, down from 1.8 percent. Peter Newland, an economist at Barclays Capital, reduced his forecast to a rate of 1.8 percent from 2 percent.
Either figure would reflect little improvement from the April-June growth rate of only 1.3 percent.
Business investment has slumped even as consumers have become more hopeful about the economy in recent months. Consumer confidence rose in October to a five-year high. Retail spending increased in September, mainly because Americans bought more cars, iPhones and appliances. And home sales are up this year, contributing to a nascent housing recovery.
Consumer spending drives nearly 70 percent of economic activity.
"We have the consumer to thank for keeping the economy above water," Feroli said.
Still, the gains are far from what is needed to ignite the economy and spur rapid hiring. Economists at JPMorgan Chase project consumer spending could increase at an annual rate of 2.2 percent in the third quarter. That's better than the 1.5 percent rate in the second quarter, but still anemic by historical standards.
Meanwhile, sluggish business investment has dragged on job creation at U.S. factories. Manufacturers slashed 20,000 jobs in the third quarter. Factories had added 194,000 jobs in the previous three quarters.
The job market has been a key topic in this year's presidential election, which is less than two weeks away. A separate report Thursday suggested hiring remains modest, at best.
Weekly applications for unemployment benefits fell last week to a seasonally adjusted 369,000, stabilizing after two weeks in which seasonal factors distorted the data. The four-week average, a less volatile measure, rose to 368,000, the Labor Department said.
Applications are a proxy for layoffs. When they fall below 375,000, it suggests hiring is strong enough to lower the unemployment rate.
Applications have fluctuated between 360,000 and 390,000 since January. At the same time, employers have added an average of nearly 150,000 jobs a month. That's barely enough to lower the unemployment rate, which has declined from 8.3 percent to 7.8 percent this year.
A third report Thursday showed the housing recovery may be cooling off. The National Assocation of Realtors index of sales agreements showed the number of Americans who signed contracts to buy homes rose only slightly in September from August. That suggests sales may level off in the coming months after solid gains in the past year.
Signed contracts are up 14.5 percent from a year ago.
Housing is rebounding after a six-year slump. New home sales jumped last month to the highest annual pace in two and a half years. And builders broke ground on new homes and apartments at the fastest pace in more than four years in September.
This year will likely be the first time in six years that housing contributes to overall economic growth.
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