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Durable Goods Orders Fall More Than Expected, Down 2.8% in May

New orders for long-lasting U.S.-made manufactured goods tumbled a larger-than-expected 2.8% in May, raising doubts about the strength of the factory sector and business expansion plans.

It was the first drop in durable goods orders since January and followed a 1.1% rise in April, the Commerce Department said on Wednesday. Analysts were expecting orders to slip by only 1%.

A separate report showed U.S. mortgage applications fell for the second straight week as interest rates remained near recent highs and made home buying more expensive.

"The May durable goods report indicates that business decision-makers remain uncertain about the short-term prospects for U.S. economic growth," said Cliff Waldman, an economist for the Manufacturers Alliance/MAPI.

The data boosted U.S. Treasury debt prices and pushed down stocks and the dollar, as the weak durables orders suggested backsliding from earlier signs of a resurgence in manufacturing. A report from the Institute of Supply Management earlier in the month had shown that factory activity had risen to its highest level in more than a year in May.

In a worrisome sign for business investment plans, nondefense capital goods orders excluding aircraft, seen as a proxy for business spending, slipped a larger-than-expected 3%, the biggest drop since January. Economists had expected just a 0.1% decrease.

"This tells us is that businesses are spending with caution," said John Lonski, chief economist at Moody's Investors Service. "They are definitely not expanding production capacity within the United States. They may be doing so at their production facilities outside the U.S."

Flagging business investment would add to the uncertain recovery of the housing market as another question mark for the economy's ability to bounce back convincingly from a sluggish 0.6% annual growth rate in the first three months of 2007, as many analysts have anticipated.

Federal Reserve officials, who began a two-day policy meeting on Wednesday, had worried earlier in the year about anemic business investment. More recently they were cautiously optimistic that strong corporate profits and favorable financial conditions would support higher investment.

The Fed is widely expected to hold benchmark overnight borrowing costs steady at 5.25%.

Transportation Orders Off

Orders for transportation equipment fell 6.8% as demand for civilian aircraft and parts tumbled 22.7%.

But even excluding volatile transportation orders, durables orders declined by 1% as manufacturing, machinery, metals and electrical equipment orders fell.

When defense orders were stripped out, durables orders dropped 3.2%. Analysts were expecting durables to rise 0.3% ex-transportation and to gain 0.5% outside defense.

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