AI-related spending propels US core capital goods orders in March

By Lucia Mutikani

WASHINGTON, April 29 (Reuters) – New orders for key U.S.-manufactured capital goods increased by the most in nearly six years in March while their shipments rose solidly, suggesting that business spending on equipment helped drive economic growth in the first quarter.

While other data from the Commerce Department on Wednesday showed a sharp widening in the goods trade deficit last month amid strong import growth, the anticipated drag on gross domestic product from the shortfall was likely blunted by a strong increase in business inventories. 

The Commerce Department is due to publish its advance estimate of first-quarter GDP on Thursday.

Business spending on equipment is being fueled by an artificial intelligence investment boom and the construction of data centers underpinning it, helping to support manufacturing despite tariffs on imports.

Economists said a rush to place orders in anticipation of higher prices and shortages because of the U.S.-Israeli war with Iran probably accounted for the larger-than-expected increase in the so-called core capital goods bookings.

Signs of strong business spending, though some of it was due to inflation, cemented expectations that the Federal Reserve would keep its benchmark overnight interest rate in the 3.50%-3.75% range on Wednesday and probably leave it there for some time.

“The stunning degree of strength during a month when firms would have had valid reason to be cautious attests to the substantial energy in business investment that was bottled up last year due to policy-related uncertainty,” said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets.

Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, jumped 3.3% last month, the Commerce Department’s Census Bureau said. That was the largest rise since June 2020 and followed an upwardly revised 1.6% increase in February. 

Economists polled by Reuters had forecast these so-called core capital goods orders gaining 0.5% after a previously reported 0.7% advance in February. The broad rise in orders was led by computers and electronic products, which shot up 3.7%, reflecting strong demand for communications equipment. 

There were also solid gains in orders for machinery, electrical equipment, appliances and components. Shipments of core capital goods advanced 1.2% after rising 1.3% in February. They are among the components that go into the calculation of the business spending on equipment component in the GDP report.

Economists expected that business investment in equipment helped to offset an anticipated further slowdown in consumer spending last quarter.

Orders for durable goods meant to last three years or more, items ranging from toasters to aircraft, rebounded 0.8% in March after dropping 1.2% in February. They were lifted by a 0.8% increase in orders for transportation equipment.

Stocks on Wall Street traded lower. The dollar advanced against a basket of currencies. U.S. Treasury yields rose. 

GOODS TRADE DEFICIT WIDENS

In a separate report, the Census Bureau said that the goods trade deficit increased 5.3% to $87.9 billion in March. 

Imports of goods increased $9.6 billion to $299.3 billion, reflecting an 11% surge in motor vehicles. There were also solid increases in imports of food, consumer, capital goods and industrial supplies. 

Some of the imports ended up as inventory at warehouses. Wholesale inventories increased 1.4%, while stocks at retailers climbed 0.7%. Goods exports increased $5.2 billion to $211.5 billion in March amid rises in shipments of food, motor vehicles, capital goods and industrial supplies, which include petroleum. Exports of consumer goods, however, dropped 7.5%.

Economists expected the Middle East conflict to boost goods exports in the months ahead, given the U.S. is a net oil exporter.

Strong core capital goods shipments and a rise in inventories indicated a potential overshoot of economists’ GDP growth estimates for the January to March quarter. GDP growth likely increased at a 2.3% annualized rate, a Reuters survey of economists predicted, after a 0.5% gain in the fourth quarter. 

News on the housing market was mixed. A third report from the Census Bureau showed single-family homebuilding increased to a 13-month high in March, but the improvement was likely the result of builders catching up after weather-related disruptions at the start of the year. Permits for future construction fell sharply and higher mortgages remain a constraint for buyers.

Single-family housing starts, which account for the bulk of homebuilding, surged 9.7% to a seasonally adjusted annual rate of 1.032 million units, the highest level since February 2025. They rose 8.9% year-on-year in March. 

Permits for future construction of single-family homes fell 3.8% last month to 895,000 units and were down 7.9% year-on-year. Homebuilding was already under pressure from tariffs on imported goods, including lumber and vanity cabinets, before the war abruptly halted a downward trend in mortgage rates. 

Economists believe residential investment, which includes homebuilding, contracted for a fifth straight quarter in the January-March period. 

“We expect housing starts to fall again in April and May as the uncertainty and higher costs brought by the war in the Middle East cause both builders and potential buyers to take a step back in the near-term,” said Ben Ayers, senior economist at Nationwide.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama, Mark Porter and Tomasz Janowski)