US business spending mired in weakness, but economy picking up

But the outlook for the economy remains encouraging, with other data on Wednesday showing consumer sentiment at a five-month high in December and personal income rising for an eighth straight month in November. That should support consumer spending and generate enough economic growth for the Federal Reserve to steadily raise interest rates next year. (CAT machines are seen on a lot at Milton CAT in North Reading, Massachusetts. - Reuters flepic)

WASHINGTON: U.S. business spending intentions weakened in April for a third straight month amid soft demand for machinery, but a surge in contracts to purchase previously owned homes to a 10-year high supported views economic growth was gaining speed.

The growth picture was further boosted by another report on Thursday showing the number of Americans seeking unemployment benefits fell more than expected last week, pushing them back to near cycle lows.

"Overall domestic growth momentum appears to be on the mend. Nevertheless, the weak performance in business capital investment activity suggests that this segment remains a source of drag for the U.S. economic recovery," said Millan Mulraine, deputy chief economist at TD Securities in New York.

The Commerce Department said orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, fell 0.8 percent after slipping 0.1 percent the prior month. These so-called core capital goods orders have now declined for three consecutive months.

Economists polled by Reuters had forecast core capital goods orders increasing 0.4 percent last month.

The persistent decline in these orders comes as the manufacturing sector remains pressured by lower energy prices, which have eroded profits of energy companies and forced oilfield services firms like Schlumberger and Halliburton to slash capital spending budgets.

Manufacturing, which accounts for 12 percent of the economy, has also taken a knock from efforts by businesses to slim down an inventory bloat, which has undercut new orders growth. A strong dollar has been a drag on exports.

Shipments of core capital goods - used to calculate equipment spending in the gross domestic product report - rose0.3 percent last month, reversing March's 0.3 percent drop.

Much of the factory sector weakness has been concentrated in the heavy machinery segment, where manufacturers have also been hurt by reduced demand for agricultural equipment. In April, orders for machinery tumbled 1.9 percent after dropping 0.8 percent in March.

U.S. stocks were trading slightly lower after recent strong gains, while prices for U.S. government debt rose. The dollar slipped against a basket of currencies.

In a separate report, the National Association of Realtors said its pending home sales index jumped 5.1 percent last month to its highest level since February 2006. Pending home contracts become sales after a month or two, and April's surge pointed to further gains in home resales.

The housing market is being underpinned by a tightening labor market, which is starting to lift wages, as well as still very low mortgage rates. But a shortage of properties available for sale remains a hurdle and house prices have risen faster than wages, sidelining some first-time buyers.


A third report from the Labor Department showed initial claims for state unemployment benefits declined 10,000 to a seasonally adjusted 268,000 for the week ended May 21.

Economists had forecast initial claims falling only to 275,000 in the latest week. Claims have now been below 300,000, a threshold associated with a strong job market, for 64 straight weeks, the longest stretch since 1973.

The pending homes sales and jobless claims data joined reports on retail sales, housing and industrial production in suggesting the economy was gaining steam after growth slowed to a 0.5 percent annual pace in the first quarter. The Federal Reserve Bank of Atlanta is currently estimating second-quarter GDP growth at a 2.9 percent rate.

Despite the persistent weakness in business spending, the steady stream of fairly upbeat reports could give the Federal Reserve ammunition to raise interest rates again next month.

Minutes from the Fed's April 26-27 policy meeting, published last week, showed most officials considered it appropriate to raise rates in June if data continued to point to an improvement in second-quarter growth.

With oil prices near $50 per barrel and the dollar's rally fading, there is hope for a manufacturing turnaround.

"Manufacturing has indeed bottomed out and with a gradual improving trend emerging, the exact degree of which remains to be ascertained in the period ahead," said Anthony Karydakis, chief economic strategist at Miller Tabak in New York.

The Commerce Department report also showed orders for durable goods, items ranging from toasters to aircraft meant to last three years or more, jumped 3.4 percent last month after increasing 1.9 percent in March.

The rise in durable goods orders last month was led by an 8.9 percent jump in bookings for transportation equipment. Orders for civilian aircraft soared 64.9 percent. There were increases in orders for motor vehicles, fabricated metal products, computers and electronic goods, and electrical equipment, appliances and components.

Durable goods inventories declined further in April, a good sign for the manufacturing's future prospects, while unfilled orders increased 0.6 percent. Durable goods shipments rose 0.6 percent following two consecutive months of declines.- Reuters
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