US durable goods shipments increased in June suggesting increase in business spending

Government reports on the second quarter GDP estimates on Friday prompted economists to raise growth forecasts to 3.5% annual rate.

The Dollar Business  Bureau 

Key US-made consumer durable goods shipments showed an increase in June for the 5th consecutive month indicating that business spending on equipment has increased boosting the economic growth in the second quarter. 

That the US economy is bettering gained weight as data gathered showed a sharp narrowing of the trade deficit in goods while there has been an increase in retail and wholesale inventories. 

Government reports on the second quarter GDP estimates on Friday prompted economists to raise growth forecasts to 3.5% annual rate.  Voicing cautioned optimism, Chris Rupkey, the Chief economist at Mitsubishi UFJ Financial Group (MUFG), New York told reporters that, ‘the economy still has legs in this long expansion from the end of the recession. The only risk we see is that the economy is running out of workers to do the heavy lifting and make us grow.’   

Shipments of core capital goods are generally used to calculate the government’s equipment spending when calculating the GDP. 

The increase in equipment spending has mostly been driven by the energy sector as oil and gas drilling picked pace after a steep decline due to the collapse in crude oil prices. 

Recovery of the energy sector is helping the manufacturing sector by offsetting some of the declining numbers in motor vehicle production. Manufacturing takes up 12% of the US economy. 

On Thursday, the US Commerce department released numbers indicating that deficit in goods trade decreased by 3.7% to $6.3bn in June due to an increase in exports. Imports of goods fell $0.7 bn to $192.4bn in June. 

Experts believe smaller goods trade deficit and increased stock accumulation are a boost to GDP growth.

However, an increase in inventories could bring down growth in the coming quarters. Voicing concerns over rising inventories, Tim Quinlan,  a senior economist at Wells Fargo Securities said, ‘Stockpiling is not always good news for the economy. If the accumulation of inventories is in anticipation of a quickening demand environment, that is generally positive. If it is a result of the product simply not moving because demand is drying up, that clearly is not a good signal.’ 

But another report by the Labor Department showed that layoffs remained low, with a tightened labour market. Claims for state unemployment benefits have not crossed the threshold of 300,000 for 125 straight weeks – which is the longest in history since 1970. The claims department has seen some easing which is surprising as around this time of the year, the auto manufacturing units close down for annual maintenance. 

Reacting to this, John Ryding Chief Economist at RDQ Economics in New York said, ‘The song remains the same. Companies are very reluctant to lay off workers, presumably because of the difficulty in replacing them, and the labour market is tight.’

The Dollar Business Bureau - Jul 28, 2017 12:00 IST