Demand for factory goods slips

Washers and dryers are seen on display at a store in New York July 28, 2010.

WASHINGTON (Reuters) - Demand for long-lasting U.S. manufactured goods fell in June and economic activity across much of the nation slowed through mid-July, casting doubt over how quickly the economy might escape its soft patch.

The Federal Reserve said on Wednesday the recovery lost steam in eight of 12 regions it tracks in recent weeks, with hiring modest, wages soft and price pressures subdued.

"Economic activity continued to grow; however, the pace has moderated in many districts," the Fed said.

Separately, the Commerce Department said weak receipts for transportation equipment pushed down durable goods orders 2.1 percent last month after a 1.9 percent increase in May. A closely watched reading on business spending plans also fell.

Excluding transportation, orders edged up just 0.1 percent.

"We're getting confirmation that this is more than just a soft patch in the first part of the year, that it's a more fundamental slowdown triggered in part by the political environment and jittery markets," said Michelle Meyer, an economist at Bank of America Merrill Lynch.

Economists said the drop in the so-called core category of factory orders that is used as a proxy for business spending plans was troubling and could yield slower growth in spending by businesses on equipment and software in the third quarter.

That measure -- non-defense capital goods orders excluding aircraft -- slipped 0.4 percent last month after a 1.7 percent rise in May.

"The June decline is somewhat worrisome regarding the vigor of the trend in capital spending," said Michael Feroli, an economist at JPMorgan in New York. "This is particularly so given that the June data probably predates any debt ceiling-driven precaution on the part of business behavior."

Durable goods are items ranging from toasters to aircraft that are meant to last three years or more. Though orders tend to be volatile, last month's unexpected decline suggested factory activity was losing steam.

The Fed report, based on comments by business contacts in the central bank's 12 districts, also presented a glum picture.

While most districts saw modest hiring gains, labor markets remained soft, the Fed said. Home sales were little changed since the Beige Book issued in early June and most districts reporting on home prices found them flat or declining.

Against that backdrop, wage pressures were subdued and price pressures moderated somewhat, the Fed said.

TOO MUCH UNCERTAINTY

The economy has been beset by high gasoline costs and supply chain disruptions following the March earthquake in Japan, but economists had been hopeful the recovery would be picking up speed by now.

The durable goods data helped push U.S. stock prices down but investors mostly focused on the drama in Washington, where talks to raise the nation's debt ceiling remained deadlocked.

Businesses, sitting on a $2 trillion cash pile, have been spending heavily on equipment and software. Economists said businesses still had pent-up demand, but much would depend on developments in Washington over the next days.

Politicians are no closer to agreement on raising the country's borrowing limit, and the threat of the U.S. defaulting on its debt and a downgrade of the nation's coveted triple-A credit rating is growing.

A range of U.S. companies -- from Emerson Electric Co to Corning Inc -- on Wednesday warned that demand was weakening.

Emerson Electric said U.S. and European economies have "clearly slowed" in the past two months, sending its own shares down 6.7 percent to their lowest level since September. Other industrial shares were also lower across the board.

"We have seen a definite weakening of general business activity in June and July," Emerson management said in a regulatory filing. "U.S. and European economies have clearly slowed and entered a soft-patch and it remains unclear if they will improve much in the second half of the calendar year.

Brian Levitt, an economist at OppenheimerFunds in New York, said a resolution of the budget standoff in Washington ahead of a August 2 deadline for Congress to raise the nation's borrowing limit could help lift the cloud hanging over the economy.

"We're going to need some clarity over the next week and if events turnout as the market hopes it will, there is still some impetus for growth as we head out into year-end," he said.

(Additional reporting by Scott Malone in Boston; Editing by Andrea Ricci and Neil Stempleman)