Wires

WRAPUP 1-Defense aircraft demand boosts U.S. factory orders; underlying weakness lingers

Lucia Mutikani

weakness lingers@

* Factory orders increase 1.8% in December

* Shipments of factory orders rise 0.5%

* Factory goods orders drop 0.6% in 2019

WASHINGTON, Feb 4 (Reuters) - New orders for U.S.-made goods increased by the most in nearly 1-1/2 years in December amid strong demand for defense aircraft, but weak business spending on equipment pointed to limited scope for a sharp rebound in manufacturing even as business confidence is improving.

Factory goods orders surged 1.8%, the largest gain since August 2018, the Commerce Department said on Tuesday. Data for November was revised down to show orders tumbling 1.2% instead of dropping 0.7% as previously reported.

Economists polled by Reuters had forecast factory orders would increase 1.2% in December. Excluding defense, factory orders dropped 0.6% in December after edging up 0.1% in the prior month. Overall factory orders fell 0.6% in 2019.

Easing trade tensions between the United States and China have led to a pickup in business sentiment. A survey on Monday from the Institute for Supply Management showed its measure of national factory activity rebounded in January after contracting for five straight months.

But risks continue to loom over manufacturing, which accounts for 11% of the U.S. economy. While Washington and Beijing signed a Phase 1 trade deal last month, U.S. tariffs on $360 billion of Chinese imports, about two-thirds of the total, remain.

Boeing last month suspended production of its troubled 737 MAX jetliner, which was grounded last March following two fatal crashes. The coronavirus, which has killed hundreds of people in China and infected thousands globally, could disrupt supply chains, especially for electronics producers.

U.S. stock indexes were trading sharply higher as fresh intervention by China's central bank calmed investor concerns about the health of the world's second-largest economy. Prices of U.S. Treasuries were trading lower while the dollar was stronger against a basket of currencies.

SHIPMENTS INCREASE

Shipments of manufactured goods rose 0.5% in December after gaining 0.3% in November. Unfilled orders at factories were unchanged in December after dropping 0.6% in November. Inventories at factories increased 0.5% in December after rising 0.3% in the prior month. That could limit any bounce in manufacturing.

The 18-month-long U.S.-China trade war has pressured business confidence and undercut capital expenditure. Business investment contracted in the fourth quarter for the third straight quarter, the longest such stretch since 2009.

Economists estimate Boeing's biggest assembly-line halt in more than 20 years could slice at least half a percentage point from first-quarter GDP growth. The U.S. economy grew 2.3% in 2019, the slowest in three years, after expanding 2.9% in 2018.

The coronavirus could hurt global growth, which has been stabilizing after declining since mid-2018.

Transportation equipment orders surged 7.9% in December, the biggest increase since August 2018, after plunging 8.2% in the prior month. Orders were boosted by a 168.3% jump in demand for defense aircraft and parts, which offset a 74.7% tumble in orders for civilian aircraft and parts. Motor vehicle and parts orders increased 0.5% in December.

But machinery orders fell 1.0% in December after dropping 1.2% in November. Orders for electrical equipment, appliances and components orders decreased 0.3% in December.

The government also said orders for non-defense capital goods excluding aircraft, which are seen as a measure of business spending plans on equipment, dropped 0.8% in December instead of deceasing 0.9% as reported last month.

Shipments of core capital goods, which are used to calculate business equipment spending in the gross domestic product report, declined 0.3% in December, rather than falling 0.4% as previously reported. (Reporting by Lucia Mutikani Editing by Paul Simao)