Business spending on equipment rose in January

REAL ECONOMY BLOG | February 27, 2023

Authored by RSM US LLP

Investments in business equipment posted a sharp rebound in January after two consecutive months of disappointing declines.

While the Commerce Department’s data released on Monday showed some resilience from private businesses, there were reasons to be cautious because January’s data can be quite volatile.

Still, that did not take away from the strength in orders for core capital goods—a proxy for future business investment spending excluding defense and aircraft. Those orders increased the most in five months, rising by 0.8% in January. Shipments of core capital goods also rose by 1.1% on the month after dropping in two straight months.

Earlier market forecasts had showed no change to the orders number and only a 0.2% increase in the shipments number.

If similar numbers are seen in the next two months, nonresidential private investment would be a big factor that carries overall gross domestic product growth in the first quarter of the year.

But that is a big “if” because the data is subject to large seasonal fluctuations at the beginning of the year. On top of that, with inflation coming in hotter than expected, a more hawkish Federal Reserve is likely to keep raising interest rates, which should keep investment under more stress than in January.

Inside the data, spending on defense equipment will be an important focus this year after Congress authorized an additional $45 billion for the defense budget in December. The increase will be a much-needed boost to overall growth amid recession concerns.

Orders for capital defense goods rose by 3.8% in January after falling by 1.3% in December. Defense capital goods shipments fell by 1.2% on the month.

Overall orders—including defense and aircraft—dropped by 4.5% in January, mostly because of the spike in Boeing’s orders in December.

Durable goods inventories dropped slightly in January by 0.1% after rising by 0.7% in the prior month because of strong order and shipment numbers. Core capital goods inventories, however, continued to rise since 2020, increasing by 0.3% on the month.