US businesses boost spending

 
City A.M. Reporter
US businesses shrugged off an uncertain economic environment and stepped up orders for capital goods in August, a sign the economy was not falling back into recession.

The Commerce Department has said non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, increased 1.1 per cent after falling 0.2 per cent in July.

That was well above economists' expectations for a 0.3 per cent rise and suggested that businesses, sitting on about $2 trillion (£1.3 trillion) in cash, had not responded to the recent financial market volatility by curtailing investment.

"If we were in a recession we would expect to see business orders for capital goods plummeting and they are not," said Richard DeKaser, an economist at Parthenon Group in Boston.

The solid rise in investment spending, which was accompanied by a 2.8 per cent rise in shipments of capital goods, prompted some economists to raise forecasts for third-quarter economic growth.

JPMorgan lifted its GDP growth forecast to an annual rate of 1.5 per cent from 1.0 per cent, while forecasting firm Macroeconomic Advisers raised their projection to 2.1 per cent from 1.7 per cent.

Shipments of civilian capital goods orders excluding aircraft go into the calculation of GDP.

"While we don't yet know the split between how much went to domestic versus foreign buyers, this almost certainly implies another solid quarter for capital equipment spending," said Michael Feroli, an economist at JPMorgan in New York.

The data helped lift stocks on Wall Street, with the Dow Jones industrial average briefly rising one per cent. Prices for Treasury debt fell, while the dollar rose broadly.

Extreme volatility in financial markets, as politicians in Washington fought over budget policy and Europe struggled to come to grips with its debt crisis, had knocked confidence and raised the risk of a new US recession.

While businesses are investing in machinery, they have been cautious on hiring. Nonfarm employment failed to grow in September for the first time in a year.