By Lucia Mutikani

WASHINGTON (Reuters] – April’s decline in U.S. capital goods orders was a sign of a moderation in equipment spending in the second quarter. Additionally, headwinds such as rising interest rates, tightening financial markets, and increasing debt levels are becoming more prominent.

Commerce Department on Wednesday reported that non-defense capital goods orders excluding aircraft increased by 0.3% last month. It is closely monitored proxy for business spending planning.

This so-called core capital good orders increased 1.1% in March. These orders were up 18.0% year-on–year.

Michael Pearce is a Senior U.S. Economist at Capital Economics, New York. He stated “Rate-sensitive equipment investment growth has begun to slow.” This is in line with our belief that higher interest rates are causing economic activity to bend rather than break.

Reuters polled economic experts and predicted core capital goods orders rising 0.5%. Inflation was also a contributing factor to orders’ gains last month.

Even though the economy was suffering from a trade deficit, robust business investments in equipment kept domestic demand high in the first quarter.

The Federal Reserve adopted a hawkish monetary policy to cool inflation and reduce demand. This sparked a sell-off in the stock markets and increased U.S. Treasury yields, which may slow down capital expenditure growth.

Since March, the Fed has increased its policy interest rates by 75 basis points. It is anticipated that the U.S. central banking will raise its overnight rate by half of a percentage point each meeting, which it holds in June and July.

China’s zero COVID-19 policies, which caused the closure of Shanghai’s commercial hub, are likely to further tie up supply chains, limiting capital spending.

Companies looking for labor-saving technology could help to limit the slowdown in a country with a shortage of skilled workers. Manufacturing, which is responsible for 12 percent of the U.S. economic output, would benefit from this.

Last month, core capital goods orders were held back due to a decrease in bookings for fabricated and electrical products. Orders for primary and machinery saw solid growths. However, orders for electronic and computer products fell.

Core capital goods shipped rose 0.8% in April, after rising 0.2% last March. The GDP measure uses core capital goods to determine equipment spending.

The increase in core capital goods shipment last month suggested that business spending will continue to grow, but not at the 15.3% annualized rate recorded in the first quarter. The quarter ended with a decline in gross domestic product of 1.4%

After increasing 0.6% in March, orders for durable goods, which include everything from toasters and aircraft, increased 0.4% to 0.4%. After a 0.3% drop in March, they were supported by 0.6% of an increase in transportation equipment orders.

After surging 4.8% last March, motor vehicle orders fell 0.2%. After falling 14.7% the previous month, orders for volatile civil aircraft rose 1.0%. Boeing (NYSE 🙂 announced on its website that 46 aircraft orders were received last month, as opposed to 53 for March.