New orders for key US-manufactured capital goods increased by 0.9% in June, following an upwardly revised 1.9% rise in May. Shipments of these goods surged by 1.9% last month, marking the largest advance in 4.5 years. This significant growth is primarily driven by businesses ramping up investments in artificial intelligence (AI) technology, indicating a strong economic performance in the second quarter.
The Commerce Department's report highlighted a broad increase in core capital goods orders and shipments. Robust demand for computers, electronic products, and electrical equipment powered this expansion. This AI build-out is helping to mitigate economic drag from the Middle East conflict and lingering tariffs, supporting the manufacturing sector.
This trend fits into a broader narrative of economic resilience in the US. The Federal Reserve, the US central bank, is expected to maintain its benchmark interest rate between 3.50% and 3.75%. Economists anticipate another quarter of double-digit growth in business spending on equipment. This sustained investment suggests a robust underlying economic activity, despite caution in other sectors.
Christopher Rupkey, chief economist at FWDBONDS, stated, "Equity markets are still wrestling with the valuations of many of these tech companies, but one thing is certain, and that is the capex expenditures of corporate America are keeping the economy afloat." This underscores the critical role of corporate investment in sustaining economic momentum. Priscilla Thiagamoorthy, a senior economist at BMO Capital Markets, noted that while strong capital expenditure supports economic activity, the AI-driven boom could also sustain inflationary pressures, posing a challenge for the Fed.
Looking ahead, the strong performance in capital goods orders and shipments suggests continued economic expansion. Decision-makers will closely watch the upcoming second-quarter GDP growth estimate, expected to be around 2.1% annualized. The ongoing investment in AI and the rebound in firms' spending on vehicles are key factors to monitor. The potential for sustained inflationary pressures due to AI investments will also influence future monetary policy decisions by the Federal Reserve.
Orders for computers and electronic products soared 3.1% in June, rebounding from a 1.2% increase in May. Electrical equipment, appliances, and components orders also rose by 0.9%. Shipments of core capital goods, which contribute to GDP calculations, saw their largest increase since December 2021. This was led by strong performances in computers, electronic products, and machinery sectors. Durable goods orders, which include items meant to last three years or more, rebounded by 0.3% in June after a 4.0% drop in May. This moderate gain occurred despite a decrease in transportation equipment orders.
Beyond AI, economists expect manufacturing to benefit from businesses rebuilding inventories and from tax rebates. Inventories have been drawn down for four consecutive quarters, indicating a need for restocking. Bernard Yaros, lead U.S. economist at Oxford Economics, noted that last year's fiscal package, which raises the after-tax return on qualified capital investment, will continue to be a tailwind. The biggest risk remains the geopolitical situation, but uncertainty around oil prices has not deterred business spending on equipment so far.