(Adds analyst comments, update markets)
WASHINGTON, Sept 5 (Reuters) - New orders for U.S.-made goods recorded their biggest drop in nearly three years in July, but demand for capital goods was stronger than previously reported, pointing to a faster pace of business spending early in the third quarter.
Strong business spending is underpinning manufacturing and helping offset the drag from declining motor vehicle output. Manufacturing makes up about 12 percent of the U.S. economy.
Factory goods orders tumbled 3.3 percent amid a slump in demand for transportation equipment, the Commerce Department said on Tuesday. That was the biggest drop since August 2014 and followed a 3.2 percent surge in June.
Orders excluding transportation equipment rose 0.5 percent after edging up 0.1 percent the prior month. Orders for non-defense capital goods excluding aircraft, seen as a measure of business spending plans, jumped 1.0 percent in July instead of gaining 0.4 percent as reported last month.
Orders for these so-called core capital goods slipped 0.1 percent in June. Shipments of core capital goods, which are used to calculate business equipment spending in the gross domestic product report, jumped 1.2 percent in July instead of the previously reported 1.0 percent rise.
The surge in shipments suggests that business spending on equipment strengthened further early in the third quarter.
"The recovery in business equipment investment that began late last year appears to have continued into the second half of 2017," said John Ryding, chief economist at RDQ Economics in New York.
Business investment on equipment increased at an 8.8 percent annualized rate in the April-June quarter, the fastest pace since the third quarter of 2015. Business spending is firming even as the boost from oil and gas drilling is starting to fade as ample supplies restrain crude oil prices.
In July, orders for computers and electronic products increased 2.1 percent, the biggest gain in a year. Orders for electrical equipment, appliances and components vaulted 2.6 percent, also the largest increase in a year.
MACHINERY DEMAND WEAKENING
Machinery orders, however, fell 0.9 percent. That was the largest drop in nine months and followed a 0.5 percent gain in June. Orders for industrial machinery fell 0.8 percent.
Mining, oil field and gas field machinery orders rose 1.7 percent after climbing 2.5 percent in June. Demand is slowing as oil prices have dipped below $50 per barrel, and oil rigs in operation are hovering near a two-month low.
Orders for transportation equipment sagged 19.2 percent, the biggest drop since August 2014. That reflected a 70.8 percent dive in civilian aircraft orders. Boeing has reported on its website that it received only 22 aircraft orders in July, sharply down from 184 in the prior month.
Motor vehicle orders fell 0.9 percent after being unchanged in June. Auto sales peaked last December, leading to a slump in motor vehicle production as manufacturers work to reduce an inventory overhang.
Production could get a boost from an anticipated spike in demand for automobiles as residents in storm-ravaged Texas replace flood-damaged vehicles.
In July, unfilled orders at factories fell 0.3 percent after increasing 1.3 percent in June. Manufacturing inventories gained 0.2 percent, rising for the second straight month.
Shipments rose 0.3 percent. As a result, the inventories-to-shipments ratio fell to 1.37 from 1.38 in June.
"This is consistent with our expectation for inventories to be additive to growth in the second half," said Tim Quinlan, a senior economist at Wells Fargo Securities in Charlotte, North Carolina. "The fact that the inventory-to-shipment ratio came down suggests the stockpiling is justified." (Reporting by Lucia Mutikani; Editing by Andrea Ricci and Meredith Mazzilli)