Rise in Orders of US Capital Goods. New orders for capital goods made in the United States unexpectedly increased in July, which may indicate an increase in business spending is to come. The Commerce Department said this increase was driven by strong demand for electrical equipment and appliances. Durable goods also rose more than 2.1% in July, which was the most since August 2018. These elevations will be beneficial to the economy, helping both businesses and consumers during the uncertain economic conditions.

Possible Rate Cut. President Donald Trump called for the Federal Reserve to cut interest rates following last week’s inverted yield curve, in an attempt to stimulate the economy and increase business investments. The Fed has not yet announced if a cut in short term rates is certain, but Chairman Jerome Powell said they would act as appropriate to preserve the longest economic expansion in history. A reduction in the interest rate could help counteract the negative effects of the economic slowdown on the stock market by driving investment spending to equities. In theory, a reduction should also stimulate more borrowing, triggering the economy.

Decreased Investments. The United States saw a drastic drop in core capital goods shipments during the start of the third quarter. This is used to calculate equipment spending in the government’s gross domestic product measurement. A drop in the number of shipments indicates business spending has softened, which could weigh on overall business investment and GDP. With a decrease in investment, companies may have difficulty finding funding or be stuck spending part of their growth expenditures on interest expenses.

Slowed Economy. With business investment struggling, a decline in economic growth is expected. An economist from Citigroup said that as trade concerns weigh on the market, industrial sector activity has remained soft. Slower economic growth expectations were supported with a separate report from the Chicago Fed, indicating that its national activity index fell to a reading of -0.36. Negative readings are associated with below-average economic advancement. These slowdowns could reduce consumer spending, hurting businesses and the equity markets.

The Plan. The United States saw a decline in business investment, which may be an indicator of continued economic troubles. Although shipments of goods fell a significant amount, new orders increased, which could hint at a positive outlook. The market has taken many turns recently, mainly arising from uncertain trade tensions, but with the rise in orders coupled with the possibility of a rate cut, there is anticipation that overall annual GDP will not fall.

Sources:

https://www.reuters.com/article/us-usa-economy/u-s-business-investment-appears-weak-in-third-quarter-idUSKCN1VG1DV, Lucia Mutikani, August 26, 2019

https://www.usatoday.com/story/money/2019/08/20/trump-pushes-interest-rate-cut-but-would-hurt-help-economy/2058205001/, Paul Davidson, August 20, 2019

https://www.cnbc.com/2019/08/26/us-durable-goods-orders-rise-in-july.html August 26, 2019