US business equipment spending appears to have slowed sharply in second quarter

U.S. business spending on equipment significantly moderated in Q2, with non-defense capital goods orders excluding aircraft unexpectedly falling 0.7% in June, defying economists' forecasts. This deceleration, following a strong Q1, is primarily attributed to businesses delaying capital expenditures amid persistent uncertainty over tariffs and trade policy. The data suggests potential for continued weakness in equipment investment through the second half of the year, despite broader Q2 GDP rebound expectations.

Analysis

A key indicator of U.S. business investment plans, non-defense capital goods orders excluding aircraft, unexpectedly fell 0.7% in June, defying forecasts for a 0.2% increase and signaling a significant slowdown in capital expenditures. This moderation follows a robust 23.7% annualized growth rate in the first quarter, which was largely attributed to businesses front-loading investments to preempt tariffs. The primary driver for the current weakness is persistent uncertainty over trade policy, which is causing firms to delay investment projects, a trend corroborated by a contraction in the S&P Global flash manufacturing PMI for July. While shipments of core capital goods, a component of GDP, rose 0.4%, economists note this gain is primarily due to higher prices rather than increased volume, suggesting underlying weakness. This data implies that business equipment investment will likely contribute minimally, or even negatively, to second-quarter GDP, with risks of further decline in the second half of the year as unfilled orders have also dipped. The drag from policy uncertainty appears to be overriding any stimulus from recent tax legislation, and the data is not expected to alter the Federal Reserve's path of holding interest rates steady.

Key Decisions for Investors

• Given the data indicates U.S. business investment is weakening due to trade policy uncertainty, investors should adopt a more cautious stance on domestically-focused industrial and capital goods sectors.
• Monitor forward-looking indicators such as the Purchasing Managers' Index (PMI) and unfilled order backlogs closely, as these will provide early signals of whether this capex weakness will persist into the second half of the year.
• For specific holdings like Boeing (BA), note the divergence between volatile monthly orders and the potential for long-term export growth driven by trade deals, suggesting a need to analyze company-specific order books rather than relying solely on headline macroeconomic data.