Companies are pulling back on investments despite a solid labor market, a strengthening housing sector and continuing low interest rates.
Spending on some of the building blocks of businesses—such as machines, computers and steel—is slipping. Such expenditures are an important ingredient in improving employee productivity, workers’ wages and corporate profits. A lack of investment risks trapping the economy in a low-growth mode.
The Commerce Department said Thursday orders for nondefense capital goods excluding aircraft—an important proxy for business investment—fell a seasonally adjusted 0.8% in April. The measure has declined nearly 12% since touching a postrecession peak in September 2014.
The decline stands in contrast to measures of housing, consumer spending and employment, which are all improving this spring.
The number of homes that went under contract to be sold climbed in April to the highest level in more than a decade, the National Association of Realtors said Thursday. Meanwhile, the Labor Department said initial claims for jobless benefits fell for the second straight week, a sign that hiring strengthened in May. Earlier this month, government data showed that retail spending broke out in April.
“The U.S. consumer appears to have more confidence than businesses in terms of investing for the future, given the demand for housing,” said Diane Swonk, economist at DS Economics. “It’s disturbing that businesses’ cash flow has improved dramatically and they have access to cheap debt, but they’ve deployed that on dividends and buybacks instead of investing in the future.”
Overall U.S. economic growth slowed in the first quarter to a 0.5% annualized advance, though economists surveyed by The Wall Street Journal project that gross domestic product will be revised to a 1% increase when the government publishes revisions on Friday.
Better consumer spending and housing activity is expected to propel stronger growth in the second quarter, with forecasting firm Macroeconomic Advisers on Thursday estimating GDP will increase at a 2.5% pace. That matched the projection from Barclays. BCS -0.82 % The Federal Reserve Bank of Atlanta’s GDPNow model projects the second-quarter’s growth rate at 2.9%.
Even with a second-quarter improvement, many economists expect growth for the year will remain near the roughly 2% rate recorded for most of the expansion.
The slowdown in business investment coincides with lower productivity gains since the middle of 2014. Steady hiring could indicate businesses are spending on labor instead of capital. But without equipment and other investments, it is difficult for productivity to improve over time.
Despite a recent rise in oil prices, “equipment and rental demand continues to remain at reduced levels,” David Meyer, chief executive of Titan Machinery Inc., TITN -6.54 % told investors Thursday.
The West Fargo, N.D., manufacturer of construction and agricultural equipment reported a drop-off in first-quarter sales from a year earlier, partly because of weaker commodity prices. Reduced profits from the farming sector “is impacting purchases of construction equipment by customers in the agriculture industry,” Mr. Meyer said.
Multiple factors are holding back stronger investment: The energy sector is retrenching amid low oil prices. A strong dollar and economic weakness overseas have depressed demand for U.S. exports. Consumer spending is rising, but retailers are closing stores as shopping shifts online. And stronger housing demand seems to be stoking higher prices rather than more robust construction—permits to build new homes fell 5.3% in April from a year earlier.
Potential long-run growth in the U.S. has dropped from about 3% to about 2% since the recession ended, “with much of the decline a function of slower productivity growth,” Federal Reserve governor Jerome Powell said in a speech Thursday. The productivity decline is in part driven by low capital investment, he said.
The lack of business investment complicates the picture for Fed policy makers considering an increase in the central bank’s benchmark interest rate next month. Fed officials held the rate at nearly zero from late 2008 until last December, when they lifted it about a quarter point. The policy, which helps hold down broader interest rates in the economy, is intended to stoke spending by businesses and consumers. But in recent years, businesses have failed to respond.
Still, Mr. Powell said “another rate increase may be appropriate fairly soon,” even as he expressed concern about productivity gains. The May jobs report, due out next Friday, is likely to be a key piece of data to help policy makers decide whether to move at the June 14-15 meeting. The economy has consistently added jobs since late 2010 and the unemployment rate, at 5% last month, is near to what the Fed expects for a long-run average.
Thursday’s report from the Commerce Department did show overall manufacturing demand up in April. Total orders for durable goods—products designed to last at least three years, such as cars and appliances—rose 3.4% last month. The gain was nearly entirely due to a surge in the volatile civilian-aircraft category.
Durable-goods orders are up 0.8% so far this year, supported by demand for planes and military equipment. The data matches with other manufacturing measures showing the sector has returned to slow growth after contracting earlier in the year.
“The headwinds constraining the economy—weak exports, slow capital spending, cautious inventory management—weigh heavily on the manufacturing sector,” said Michael Moran, economist at Daiwa Capital Markets America. “Stability after a downward drift for more than one year suggests that the winds might be diminishing.”
—Ben Leubsdorf contributed to this article.
Eric Morath at email@example.com