---- by Christopher Anstey ---- WASHINGTON (AFX) - A larger than expected drop in durable goods orders shows no upturn can be seen in US capital spending, analysts said, leaving the Federal Reserve likely to cut the key interest rate by another 25 basis points next month.
"The durable goods data are not showing much of an improvement, with capital spending still weak," said Jay Feldman, economist at CS First Boston, adding that the data indicated "no upswing" in future corporate capital spending.
Combined with reports on weekly jobless claims and labor costs in the second quarter, the data released this morning "keeps (the Fed) on track for another 25 basis points in easing at the next scheduled meeting," said Henry Willmore, senior economist at Barclays Capital in New York.
The Commerce Department earlier said durable goods orders dropped 2.0 pct, after a downwardly revised 2.7 pct rise in May.
"The detail makes for grim reading as far as capital spending is concerned," HSBC economists wrote in a research note. All major categories posted a drop in orders for June, with non-defense capital goods orders falling 3.4 pct in June, and dropping 25.2 pct on an annualised basis in the second quarter.
"This will probably lead to some economists nudging down their forecast for (tomorrow's) Q2 GDP report," HSBC economists said. Analysts noted that the weakness in durable goods orders stood in contrast with the National Association of Purchasing Management (NAPM) monthly surveys of business activity, which have indicated a bottoming out of the recession in manufacturing.
"Overall, (the durable goods report is) bad, but NAPM says the rate of fall will soon slow sharply," said Ian Shepherdson, economist at High Frequency Economics, in a note to clients.
Separately, the Labor Department said the employment cost index (ECI) -- a broad measure of labor costs -- rose 0.9 pct in the second quarter, and 3.9 pct year-on-year. In the first quarter, the ECI rose 1.1 pct. The slight decline in employment costs pressures is insufficient to help boost corporate profit margins, analysts cautioned. "Labor costs are responding very gradually to easing in the labor market," Feldman said, adding that "wages tend to be sticky." "I'm not sure they're coming down enough to relieve corporate profit margins," he said.
Meanwhile, economists discounted the Labor Department's report of a 51,000 plunge in weekly claims for regular unemployment insurance, to 366,000 for the week ended July 21.
Weekly jobless claims tend to be volatile this time of year, they said, as automobile companies lay off workers in order to retool plants, then bring them back on the payrolls.
"The drop might be significant, but we will have to see if it is sustained in coming weeks," said Henry Willmore, senior economist at Barclays Capital in New York.
"It's a bit early to say" there's a turnaround, Feldman agreed. However, Shepherdson said the drop indicates that jobless claims are probably past their worst.
"We do think the underlying trend in claims is now flat, though it is still high enough to ensure the unemployment rate keeps rising for some time yet. But the worst of the worst is over," he concluded.