By Lucia Mutikani
WASHINGTON, Sept 25 (Reuters) - 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 on Friday 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-driven growth spurt. Some industry leaders have called for regulation of AI.
Rising oil prices, interest rates and long-term US Treasury yields because of the Middle East conflict will hurt manufacturing that is not tied to AI, some economists warned.
"The AI investment boom is real and it is carrying the economy along with it," said Christopher Rupkey, chief economist at FWDBONDS. "The only risk for the economy is that eventually all equipment expenditures and data centers will be completed and the catalyst for growth after this AI bubble stops inflating is not certain. 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% last month after an upwardly revised 0.6% 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% after a previously reported unchanged reading in July. Core capital goods orders increased 10.6% year-on-year in August.
Last month's increase was led by a 1.1% 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% and were up 20.1% on a year-on-year basis. Orders for communications equipment rose 0.3% and surged 35.8% on a year-on-year basis.
STRONG ORDER GROWTH
Machinery orders increased 1.1%, while bookings for primary metals vaulted 1.2%. But orders for fabricated metal products decreased 1.3%. 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% last month after advancing 1.4% in July.
Overall non-defense capital goods orders rose 1.2%, though shipments fell 1.3% after hefty gains in the prior months. Business spending on equipment has notched two straight quarters of double-digit growth, contributing to the 1.5% annualized growth pace in GDP in the second quarter. Growth estimates for the third quarter are mostly well above a 3.0% rate.
"We are a little skeptical that non-AI investment will continue to grow at the current pace, given that the recovery in the regional Fed surveys’ measure of manufacturing capex intentions seems to have stalled roughly around its long-run average," said Oliver Allen, senior economist at Pantheon Macroeconomics.
The strong economic performance gives the Federal Reserve scope to raise interest rates further as it battles inflation. The US central bank last week hiked its overnight benchmark interest rate by 25 basis points to the 3.75%-4.00% range, the first hike in three years, and flagged further increases in borrowing costs in the months ahead.
Financial markets are pricing in a roughly 68.6% chance of another rate increase next month, CME's FedWatch tool showed. The dollar slipped against a basket of currencies. US Treasury yields rose.
Orders for durable goods, items ranging from toasters to aircraft that are meant to last three years or more, were unchanged last month after rising 0.9% in July. They were restrained by a 0.6% drop in transportation equipment orders.
Motor vehicles and parts orders fell 0.6%, while the volatile civilian aircraft orders component dropped 4.3%. Boeing reported on its website that it had received 15 orders for commercial aircraft, down from 38 in July.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci)
