Solid business spending plans offer ray of hope for factories

By Lucia Mutikani

WASHINGTON (Reuters) – A gauge of U.S. business investment spending plans increased solidly for a second straight month in April, a hopeful sign for manufacturing activity after a long spell of weakness.

The overall economy is gradually firming, with other reports on Tuesday showing consumer confidence perking up this month and house prices extending gains in March, which should boost household equity and support consumer spending.

The Commerce Department said non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, rose 1.0 percent last month after an upwardly revised 1.5 percent increase in March.

The so-called core capital goods orders were previously reported to have increased 0.6 percent in March.

“It provides some indication that business capital investment activity might be on the mend,” said Millan Mulraine, deputy chief economist at TD Securities in New York.

Business spending has slackened as a sharp decline in energy prices forced oilfield companies, including Schlumberger <SLB.N> and Halliburton <HAL.N>, to slash their capital expenditure budgets. Investment has also been undermined by a strong dollar, which has squeezed profits of multinational corporations.

In a separate report, the Conference Board said its index of consumer attitudes rose to 95.4 this month from 94.3 in April.

Consumers’ outlook for the labor market improved, with a rise in the share of households anticipating more jobs in the months ahead.

The rebound in business spending, together with a sturdy labor market, a strengthening housing market and firming underlying inflation, should keep the Federal Reserve on course to raise interest rates later this year.

The dollar rallied against a basket of currencies on the upbeat data, while prices for U.S. government debt prices rose. U.S. stocks were trading lower.

The increase in core capital goods orders offers cautious optimism that business spending outside the energy sector will pick up in the coming months and support manufacturing, and the broader economy, after a dismal first quarter.

Although order books at manufacturers remain lean, the core capital goods data corroborates other surveys, including one on small businesses, that showed a jump in capital expenditure plans in April and May.

Economic growth slumped early in the year and data so far on retail sales and manufacturing point to tepid economic activity early in the second quarter. Economists polled by Reuters had forecast core capital goods orders gaining 0.4 percent.

Shipments of core capital goods, which are used to calculate equipment spending in the government’s gross domestic product measurement, rose 0.8 percent last month after a 1.0 percent increase in March.

A 2.5 percent drop in transportation equipment, however, weighed down on overall orders for durable goods – items ranging from toasters to aircraft that are meant to last three years or more – which fell 0.5 percent last month.

Orders for machinery recorded their biggest gain in eight months in April and the increase in bookings for primary metals was the largest since September. While orders for computers and electronic products fell 3.6 percent, that followed a hefty 7.7 percent surge in March.

Orders for electrical equipment, appliances and components dropped 1.5 percent after gaining 0.9 percent the prior month.

In another report the Commerce Department said new home sales increased 6.8 percent to a seasonally adjusted annual rate of 517,000 units. March’s sales pace was revised up to 484,000 units from the previously reported 481,000 units.

The upbeat report added to housing starts data in indicating that housing was gaining momentum after treading water for much of last year.

A fourth report showed single-family home prices rose in March from a year earlier. The S&P/Case-Shiller composite index of 20 metropolitan areas increased 5 percent from a year ago, matching February’s gain.

Economists believe housing will take the baton from a lethargic manufacturing sector and help to drive economic growth this year. Housing is being buoyed by a strengthening jobs market, which is encouraging young adults to set up their own households.

While higher home prices could reduce affordability, they could encourage more homeowners to put their houses on the market, which could ease supply constraints and boost sales. In addition, higher home values boost household net worth, which is positive for consumer spending.

(Reporting by Lucia Mutikani, additiona; Editing by Andrea Ricci)

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