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Factory Orders Fly Even as Defense in the Dumps

Wednesday, 27 Feb 2013 | 10:26 AM ET
A specialty retailer of durable goods, including home appliances, furniture, mattresses and consumer electronics.
Aaron M. Sprecher | Bloomberg | Getty Images
A specialty retailer of durable goods, including home appliances, furniture, mattresses and consumer electronics.

A gauge of planned U.S. business spending increased by the most in just over a year in January and new orders for long-lasting manufactured goods excluding transportation rose solidly, pointing to underlying strength in factory activity.

The Commerce Department said on Wednesday non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, jumped 6.3 percent, the biggest gain since December 2011, after slipping 0.3 percent in December.

Economists had expected this category to only rise 0.2 percent.

"The strong gains in core capital goods orders suggests that business investment activity, which has been one of the sour points of this economic recovery, could provide a meaningful lift to overall economic activity this quarter," said Millan Mulraine, a senior economist at TD Securities in New York.

Durable Goods Down 5.2% in January
CNBC's Rick Santelli reports the latest data on new manufacturing orders and what it indicates about the economy, with CNBC's Steve Liesman.

Durable goods orders excluding transportation increased 1.9 percent, the largest gain since December 2011, after increasing 1 percent in December. That was well above economists' expectations for a 0.2 percent increase.

However, overall orders for durable goods - items from toasters to aircraft that are meant to last at least three years - tumbled 5.2 percent as demand for civilian and defense aircraft fell sharply.

Last month's drop was the first since August.

The strong rise in so-called core capital goods should bolster expectations for business spending on equipment and software to remain on an upward trend this quarter.

Still, the report is unlikely to change the Federal Reserve's very easy monetary policy stance.

Factory activity has cooled in recent months after helping to lift the economy from the 2007-09 recession. Sluggish domestic demand, tighter fiscal policy and slowing global growth are holding back manufacturing.

Last month, shipments of non-defense capital goods orders excluding aircraft, used to calculate equipment and software spending in the gross domestic product report, fell 1 percent after being flat the prior month.

Overall orders for durable goods were dampened by a 19.8 percent drop in transportation equipment as demand for civilian aircraft dived 34 percent.

Boeing received orders for only 2 aircraft, down from 183 in December, according to information posted on the plane maker's website. The decline in orders is probably not related to the grounding of Boeing's 787 Dreamliners after problems with overheating batteries.

However, aircraft orders are very volatile and typically tend to fall at the start of the year.

"I haven't heard any reports about airlines canceling their orders. This could be one-month lull rather than something greater," said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Conn.

Defense aircraft orders collapsed 63.8 percent after soaring 58.5 percent in December, likely as orders were pushed forward ahead of $85 billion in government-wide spending cuts.

The cuts, which are part of a plan to reduce the budget deficit, are set to kick in on Friday, unless Congress and the Obama administration come up with a last minute deal. Defense will bear much of the cuts.

Fed Chairman Ben Bernanke on Tuesday urged lawmakers to avoid the sharp spending cuts and warned they could combine with earlier tax hikes to create a "significant headwind" for the modest recovery.

Defense capital goods orders plunged 69.5 percent in January, the sharpest fall since July 2000. Orders for motor vehicles were flat.

Orders for machinery recorded their largest increase since May 2010. There were also gains in orders for fabricated metal products, electrical equipment and appliances.

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