New orders for key U.S.-made capital goods rose modestly in July while shipments fell by the most in nearly three years, pointing to continued weakness in business investment and a slowdown in economic growth early in the third quarter.

Coming against the backdrop of an escalation in U.S.-China trade tensions, the report from the Commerce Department on Monday could provide more ammunition for the Federal Reserve to cut interest rates again next month. 

Fed Chair Jerome Powell told a conference of central bankers last week that trade policy uncertainty seems to be playing “a role in the global slowdown and in weak manufacturing and capital spending in the United States.” Though Powell described the economy as being in a “favorable place,” he reiterated that the U.S. central bank would “act as appropriate” to keep the longest economic expansion in history on track. 

The Fed lowered its short-term interest rate by 25 basis points last month for the first time since 2008, citing trade tensions and slowing global growth. Financial markets have fully priced in another quarter-percentage-point cut at the Fed’s September 17-18 policy meeting. 

“The report reaffirms that industrial sector activity and business investment remain soft, in line with weakness globally as trade concerns weigh on activity,” said Veronica Clark, an economist at Citigroup in New York. “With remaining downside risks, we continue to expect that the Fed will again cut rates by 25 basis points at its meeting in September.” 

Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, increased by 0.4 percent last month, the government said, driven by strong demand for electrical equipment, appliances and components. 

Data for June was revised down to show these so-called core capital goods orders advancing by 0.9 percent instead of surging by 1.5 percent as previously reported. 

Economists polled by Reuters had forecast core capital goods orders would fall by 0.1 percent in July. Core capital goods orders increased by 1.5 percent on a year-on-year basis. 

Shipments of core capital goods fell by 0.7 percent last month, the biggest drop since October 2016. Core capital goods shipments are used to calculate equipment spending in the government’s gross domestic product measurement. Data for June was revised down to show core capital goods shipments were unchanged instead of rising by 0.3 percent as previously reported.

Shipments fall

The drop in core capital goods shipments suggests business spending on equipment softened at the start of the third quarter, which could weigh on overall business investment and GDP growth. Business investment contracted in the second quarter for the first time since the first quarter of 2016. 

Expectations for slower economic growth were also reinforced by a separate report on Monday from the Chicago Fed showing its national activity index fell to a reading of -0.36 in July from 0.03 in June. According to the Chicago Fed, negative readings have been associated with below-average economic growth. 

The economy grew at a 2.1-percent annualized pace in the second quarter. Weak business investment is underscored by manufacturing, where output has contracted for two straight quarters. Manufacturing, which accounts for about 12 percent of the economy, is also being undercut by an inventory bloat and design problems at Boeing. 

In July, orders for electrical equipment, appliances and components jumped by 1.1 percent. But orders for machinery fell by 0.6 percent. There were also declines in orders for primary metals and fabricated metal products.

Overall orders for durable goods, items ranging from toasters to aircraft that are meant to last three years or more, increased by 2.1 percent in July, the most since August 2018, after rising by 1.8 percent in the prior month. 

Orders for transportation equipment jumped by 7.0 percent after gaining by 4.1 percent in June. Motor vehicles and parts orders rose by 0.5 percent last month. Orders for non-defense aircraft and parts increased by 47.8 percent. Boeing reported on its website that it had received orders for 31 aircraft in July, excluding its troubled 737 MAX plane, up from only nine in June. 

The world’s largest plane maker has cut production of the 737 MAX, which was grounded in March following two fatal crashes in Ethiopia and Indonesia. Deliveries of the plane have also been suspended, leading to a 16.2-percent drop in aircraft shipments in July. 

Overall durable goods shipments dropped by 1.1 percent last month. Unfilled orders for these goods edged up 0.1 percent, while inventories increased by 0.4 percent, suggesting manufacturing would probably continue to struggle in the coming months. 

“The data confirm that business investment momentum continues to fade and is likely to provide limited support to GDP growth in the second half,” said Lydia Boussour, a senior U.S. economist at Oxford Economics in New York. 

“The combination of tighter financial conditions, elevated trade uncertainty and deteriorating global growth will weigh on investment decisions in coming months, putting further downside risk to the already fragile business investment picture.”