US Goods Orders Point to Robust Growth

New orders for key US-manufactured capital goods increased more than expected in August and data for the prior month was revised sharply higher, pointing to another quarter of robust growth in business spending on equipment amid an artificial intelligence infrastructure buildout.

The upbeat report from the Commerce Department followed on the heels of a survey this week from S&P Global showing an acceleration in business activity in September. But concerns are emerging over the sustainability of the AI-related demand. Some industry leaders have called for regulation of the technology. There are also worries that rising oil prices, interest rates and long-term US Treasury yields because of the Middle East conflict will hurt manufacturing not tied to AI.

“The AI investment boom is real and it is carrying the economy along with it,” said Christopher Rupkey, chief economist at FWDBONDS. “Investment spending is considered a growth accelerator, but eventually the music will stop.” Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, jumped 1.6 percent last month after an upwardly revised 0.6 percent increase in July, the Commerce Department’s Census Bureau said.

Economists polled by Reuters had forecast these so-called core capital goods orders rising 0.5 percent after a previously reported unchanged reading in July. Core capital goods orders increased 10.6 percent year-on-year in August. Last month’s increase was led by a 1.1 percent rebound in orders for electrical equipment, appliances and components. While overall orders for computers and electronic products were unchanged, individual components showed strength.

Orders for computers and related products soared 1.5 percent and were up 20.1 percent on a year-on-year basis. Orders for communications equipment rose 0.3 percent and surged 35.8 percent on a year-on-year basis. Machinery orders increased 1.1 percent, while bookings for primary metals vaulted 1.2 percent. But orders for fabricated metal products decreased 1.3 percent. Aside from AI, business spending on equipment has also been supported by tax incentives in last year’s big tax legislation as well firms front-loading orders to avoid higher prices from import tariffs and the Middle East conflict.

Some economists said there were already signs that capital spending was slowing, pointing to a moderation in measures of capital expenditure plans in regional Federal Reserve manufacturing surveys. “But we would caution that the growth rate of new investment could slow when activity and spending levels are already so high,” said Veronica Clark, an economist at Citigroup. “We see some early signs that this slowing growth may be occurring in recent manufacturing sector data.” Shipments of core capital goods, which go into the calculation of the business spending on equipment component in the gross domestic product report, increased 0.6 percent last month after advancing 1.4 percent in July. Overall non-defense capital goods orders rose 1.2 percent, though shipments fell 1.3 percent after hefty gains in the prior months. Business spending on equipment has notched two straight quarters of double-digit growth, a streak that economists at JP Morgan and Goldman Sachs believed extended into the third quarter. Goldman Sachs lifted its GDP growth estimate for the July-September quarter to a 3.4 percent annualized rate from a 3.3 percent pace. The economy grew at a 1.5 percent rate in the second quarter.

Lofty growth estimates for this quarter also reflect strong consumer spending, despite high inflation stemming from the US-Zionist entity warwith Iran.

Spending is likely to remain high, in part as consumers pull forward purchases in anticipation of further price increases. A survey from the University of Michigan on Friday showed an improvement in buying conditions for durables this month “in part due to a perception that completing such purchases now would help consumers avoid higher prices in the future.” The Surveys of Consumers’ Consumer Sentiment Index fell to a final reading of 48.1 in September, a four-month low, from 51.7 in August.