By Lucia Mutikani
WASHINGTON (Reuters) – Demand for long-lasting U.S. manufactured goods rebounded more than expected in May and a gauge of planned business spending increased, but a slowing of growth in the global economy suggests the momentum might not be sustained.
China’s slowdown and a looming recession in the euro zone have taken some of the shine off the U.S. manufacturing sector, leaving the economy stuck in a soft patch.
Despite the 1.1 percent increase in durable goods orders last month, a Commerce Department report on Wednesday showed underlying weakness in manufacturing, which has shouldered the broader economy’s recovery from the 2007-09 recession.
"With global and domestic demand continuing to weaken we believe that this relatively brisk pace of new orders activity is unlikely to be sustained, and expect the pace of activity to be tepid in the coming months," said Millan Mulraine, senior macro strategist at TD Securities in New York.
Durable goods range from toasters to aircraft and are meant to last more than three years. Economists had expected orders to rise 0.4 percent last month.
Orders tend to be volatile and when assessed over a three-month period they showed a slowing trend, consistent with weakness in industrial production and regional factory activity.
While the economy is slowing, it is not falling off a cliff and the housing market is showing signs of recovery.
Signed contracts for home purchases jumped 5.9 percent in May, the most in seven months, the latest sign of improvement in a sector that has been a drag on the economic recovery.
Data this week showed new homes sales at a two-year high in May and house prices rising in April for the third straight month. Home-builder Lennar Corp reported a rise in new orders for the fifth straight quarter and was able to demand higher prices.
Shares on Wall Street were trading higher but lingering worries about Europe capped gains. Prices for U.S. Treasury debt were little changed, while the dollar rose against a basket of currencies.
Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, increased 1.6 percent after dropping 1.4 percent in April. The gain snapped two straight months of declines.
Shipments of non-defense capital goods orders excluding aircraft, used to calculate equipment and software spending in the gross domestic product report, rose 0.4 percent after declining 1.5 percent in April.
May’s data suggested businesses are willing to spend on capital goods despite uncertainty clouding the economy.
But looking at the numbers on a three-month basis, spending plans were weak, posting their biggest decline since early 2009.
Regional surveys of factory activity have mostly shown a weakening in orders this month, a trend that is likely to be highlighted in a report on national manufacturing next week.
"The underlying trends in orders and shipments of investment goods not only remain weak but point to further deceleration from the already subdued levels," said Harm Bandholz, chief economist at Unicredit Research in New York.
"That implies some modest downside risks to our outlook for the second half of the year. One reason, why companies remain reluctant to invest is the uncertain global economic outlook, including the situation in Europe."
Uncertainly about fiscal policy in the U.S., in particular the automatic spending cuts and the end of major tax cuts due next year unless Congress acts, was also making businesses nervous about committing to spending plans.
Orders were lifted by a 2.7 percent jump in transportation equipment as aircraft bookings picked up and motor vehicles demand increased, though at a slower pace than in the prior month. Excluding transportation, orders rose 0.4 percent after dropping 0.6 percent in April.
Outside transportation, details of the report were fairly mixed, with orders for machinery, electrical equipment and appliances, and capital goods increasing. Demand for primary metals and computers fell.
(Reporting by Lucia Mutikani; Editing by Neil Stempleman)