US June Core Capital Goods Orders Exceed Expectations, Driven by AI Spending and Defense Orders

U.S. June core capital goods orders increased by 0.9%, surpassing market expectations of 0.8%. Core capital goods shipments also increased by 1.9%, marking the largest increase since the end of 2021. The increase in AI-related equipment spending and defense orders is driving the manufacturing sector. Corporate investment has remained robust in the first half of the year and is expected to support second-quarter economic growth.

The U.S. Department of Commerce announced on Monday (27th) that core capital goods orders, which exclude aircraft and defense equipment and are an important indicator of corporate equipment investment, increased by 0.9% in June, surpassing market expectations of 0.8%. The May increase was also revised upwards from the initially announced 1.4% to 1.9%.

Overall durable goods orders, which include commercial aircraft and military equipment, increased by 0.3%, below market expectations. Durable goods refer to products with an expected lifespan of at least 3 years. Detailed breakdowns show increases in orders for computers, communication equipment, electrical equipment, and basic metals.

The volatile commercial aircraft orders, which had a significant drop in May, rebounded by 3.7% in June. Boeing announced that it received orders for 121 aircraft in June, far exceeding the 27 aircraft in May.

Core capital goods shipments, which better reflect actual corporate equipment spending, increased significantly by 1.9% in June, surpassing May's 0.2% and marking the largest increase since the end of 2021. On an annualized basis for the past three months, core capital goods shipment values grew by 11.1%, with a clear acceleration in growth compared to the first quarter.

Corporations are continuing to expand their investments in AI and related infrastructure this year, driving demand for information processing equipment and other related products. In April, the four major U.S. tech giants Alphabet, Meta, Microsoft, and Amazon stated that their combined AI spending for the year could reach as high as $725 billion. The increase in U.S. defense orders driven by Middle East conflicts is also providing support for capital expenditures.

The GDPNow model of the Atlanta Federal Reserve estimated, before the data release, that corporate equipment spending is expected to contribute approximately 0.88 percentage points to the second-quarter gross domestic product (GDP) growth, the largest contribution in over a year.

The U.S. government will announce the preliminary second-quarter GDP on Thursday (30th). A survey by Reuters shows that economists estimate the annualized economic growth rate for the previous quarter to be 2.1%, the same as the first quarter. Santander US Capital Markets Chief U.S. Economist Stephen Stanley stated that corporate investment spending remains robust and equipment spending may once again become the strongest final demand item in the second quarter.

However, the new tariff policy of the Trump administration and the ongoing Middle East conflict may still push up corporate costs and increase operational uncertainty, potentially leading some companies to reduce or delay investment plans.