Business investment rose sharply in August

The numbers: Orders for long-lasting or durable goods rose a stronger-than-expected 0.2% in August, but the increase stemmed from higher defense spending as the U.S. sought to replenish military hardware sent to Ukraine.

Economists polled by the Wall Street Journal had forecast a 0.5% decline.

Durable-goods orders minus defense actually fell 0.7% last month, the government said.

In a more positive sign, so-called core orders jumped 0.9%. That figure omits defense and transportation and is a proxy for broader business investment.

Yet overall business investment remains weak and conditions aren’t expected to improve much any time soon. Companies have curtailed investment since last year in response to rising interest rates and higher odds of recession.

Key details: Orders for commercial planes sank 16% in August. Boeing BA was a big drag again on the headline number.

Auto dealers reported a 0.3% increase. 

Omitting those two dominant industries, orders minus transportation rose a modest 0.4%. Bookings increased for metal parts, machinery, computers and electrical equipment.

The big uptick in core orders was somewhat of a surprise, but it remains to see if the increase is sustained. These orders give a better idea of the true condition of U.S. manufacturing since demand for planes and autos can zig-zag month to month.

Orders rise in an expanding economy and shrink in a contracting one.

Big picture: The industrial side of the economy is likely to tread water for a while. Interest rates are expected to remain high into next year, reducing demand for big-ticket items and keeping the threat of a recession elevated.

Higher borrowing costs typically stunt the economy and discourage businesses from hiring, spending and investing.

Looking ahead: “Headwinds to the sector are likely to grow over the rest of the year as tighter credit conditions weigh more heavily on investment and economic growth weakens,” said North American economist Olivia Cross of Capital Economics.

Market reaction: The Dow Jones Industrial Average DJIA, 0.11% and S&P 500 SPX, 0.06% were set to rise in Wednesday trades.

Written by:  Jeffry Bartash, reporter for MarketWatch.