Correction to Business Investment Story on Aug. 25

By Sarah Chaney Features Dow Jones Newswires

U.S. business investment is catching a second wind after years of wobbly performance.

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Companies are ramping up orders for computers, machinery and electrical appliances, a sign businesses are growing more confident in the economic outlook eight years into an economic expansion.

Durable goods orders fell 6.8% in July, but the decline was driven by aircraft orders, which had surged the month before. Stripped of the volatile transportation category, orders were up 0.5% from a month earlier and up 5.6% from a year earlier.

Orders for core capital goods, which exclude aircraft and defense and which many economists use as a proxy for broader business investment, rose 0.4% in July. They were up 3.5% in July from a year earlier. They bottomed in June 2016 and have risen six times in seven months. That pickup in business investment marks the best run since 2010, when the U.S. was coming out of recession.

Business investment is now rising at a faster rate than overall economic growth for the first time since late 2014, evidence of momentum in an eight-year-old economic expansion that has been restrained by slow productivity growth which is sometimes the result of underinvestment. U.S. business investment rose at a 5.2% pace during the second quarter, following a 7.2% increase in the first quarter.

"Business equipment investment is on track to post another big gain in the third quarter," said Michael Pearce, U.S. economist at Capital Economics, in a note to clients.

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The rise in spending comes after particularly weak investment from 2014 to 2016, resulting from a confluence of factors including weak global demand and falling energy prices. Now, with the unemployment rate hovering near a 16-year low, businesses are likely incentivized to shift from spending on labor -- which was relatively inexpensive for many years during the expansion -- to capital.

Outside of a rebound in the oil-and-gas sector, solid fundamentals -- including strong manufacturing activity -- are further propelling companies to pour money into technology, research and development and new buildings.

Target Corp. executives noted in a second-quarter earnings call earlier this month that the company had increased spending in a rollout of hundreds of remodeled stores.

"The remodels, where they will really help us...is our ability to optimize that backroom more efficiently to drive more productivity as we ship from the store," said Chief Operating Officer John J. Mulligan in a call with analysts.

Manufacturing data has signaled a positive growth trajectory for the overall economy. U.S. factory activity expanded for the 11th consecutive month in July, according to the Institute for Supply Management.

The Business Roundtable's gauge of chief executive plans for capital spending and hiring and projections for sales over the next six months reached its highest level in three years in the second quarter.

Jeff McGahey, general manager at Harry's Saw Shop in Augusta, Ga., said the power-equipment company moved into a 17,000-square-foot facility in February 2016 after outgrowing its previous location. The move, which tripled the size of Harry's showroom, has been a boon to business.

Mr. McGahey said the business is buoyed by customers' appreciation for hands-on demonstrations. "Everything has grown," Mr. McGahey said. "As growth calls, you have to grow with it or else go home."

Of course, not all companies are boosting their capital investments, and many retailers are re-evaluating their investment strategies in light of a shift to digital selling. Foot Locker Inc. plans to reduce next year's capital spending, and J.C. Penney Co. closed 127 stores in the latest quarter, joining competitors such as Macy's Inc. and Sears Holdings Corp., in a move to cut costs.

Martin Richenhagen, chief executive of farm-equipment maker AGCO Corp., said the company doesn't plan to build new factories in the coming two or three years, but is looking to ramp up investment in research and development.

"We kept investment stable at around $315 million during the last three years, and this year we might maybe invest about 10% more than in previous years," Mr. Richenhagen said.

Write to Sarah Chaney at sarah.chaney@wsj.com

U.S. business investment is catching a second wind after years of wobbly performance.

Companies are ramping up orders for computers, machinery and electrical appliances, a sign businesses are growing more confident in the economic outlook eight years into an economic expansion.

Durable goods orders fell 6.8% in July, but the decline was driven by aircraft orders, which had surged the month before. Stripped of the volatile transportation category, orders were up 0.5% from a month earlier and up 5.6% from a year earlier.

Orders for core capital goods, which exclude aircraft and defense and which many economists use as a proxy for broader business investment, rose 0.4% in July. They were up 3.5% in July from a year earlier. They bottomed in June 2016 and have risen six times in seven months. That pickup in business investment marks the best run since 2010, when the U.S. was coming out of recession.

Business investment is now rising at a faster rate than overall economic growth for the first time since late 2014, evidence of momentum in an eight-year-old economic expansion that has been restrained by slow productivity growth which is sometimes the result of underinvestment. U.S. business investment rose at a 5.2% pace during the second quarter, following a 7.2% increase in the first quarter.

"Business equipment investment is on track to post another big gain in the third quarter," said Michael Pearce, U.S. economist at Capital Economics, in a note to clients.

The rise in spending comes after particularly weak investment from 2014 to 2016, resulting from a confluence of factors including weak global demand and falling energy prices. Now, with the unemployment rate hovering near a 16-year low, businesses are likely incentivized to shift from spending on labor -- which was relatively inexpensive for many years during the expansion -- to capital.

Outside of a rebound in the oil-and-gas sector, solid fundamentals -- including strong manufacturing activity -- are further propelling companies to pour money into technology, research and development and new buildings.

Target Corp. executives noted in a second-quarter earnings call earlier this month that the company had increased spending in a rollout of hundreds of remodeled stores.

"The remodels, where they will really help us...is our ability to optimize that backroom more efficiently to drive more productivity as we ship from the store," said Chief Operating Officer John J. Mulligan in a call with analysts.

Manufacturing data has signaled a positive growth trajectory for the overall economy. U.S. factory activity expanded for the 11th consecutive month in July, according to the Institute for Supply Management.

The Business Roundtable's gauge of chief executive plans for capital spending and hiring and projections for sales over the next six months reached its highest level in three years in the second quarter.

Jeff McGahee, general manager at Harry's Saw Shop in Augusta, Ga., said the power-equipment company moved into a 17,000-square-foot facility in February 2016 after outgrowing its previous location. The move, which tripled the size of Harry's showroom, has been a boon to business.

Mr. McGahee said the business is buoyed by customers' appreciation for hands-on demonstrations. "Everything has grown," Mr. McGahey said. "As growth calls, you have to grow with it or else go home."

Of course, not all companies are boosting their capital investments, and many retailers are re-evaluating their investment strategies in light of a shift to digital selling. Foot Locker Inc. plans to reduce next year's capital spending, and J.C. Penney Co. closed 127 stores in the latest quarter, joining competitors such as Macy's Inc. and Sears Holdings Corp., in a move to cut costs.

Martin Richenhagen, chief executive of farm-equipment maker AGCO Corp., said the company doesn't plan to build new factories in the coming two or three years, but is looking to ramp up investment in research and development.

"We kept investment stable at around $315 million during the last three years, and this year we might maybe invest about 10% more than in previous years," Mr. Richenhagen said.

Write to Sarah Chaney at sarah.chaney@wsj.com

Corrections & Amplifications

This item was corrected at 5:20 p.m. ET on Fri., Sept. 8, 2017. The original misspelled Jeff McGahee's name as Jeff McGahey.

Jeff McGahee is the general manager at Harry's Saw Shop in Augusta, Ga. "Business Investment Gains Renewed Momentum -- Update," published at 12:48 p.m. ET on Aug. 25, misspelled Mr. McGahee's surname in the 13th and 14th paragraphs. The error also appeared in an earlier version of the story published at 8:40 a.m. on Aug. 25. (Sept. 8)

(END) Dow Jones Newswires

September 08, 2017 17:33 ET (21:33 GMT)