Durables orders up, home sales disappoint

WASHINGTON (Reuters) - New orders for costly and long-lasting U.S.-made goods rose a surprisingly strong 3.4 percent in March, according to a government report on Wednesday that showed businesses investing to expand operations.

But another report showing weaker-than-expected sales of new homes and big stocks of completed but unsold homes damped hopes for improvement in the slowing U.S. economy, despite the signs of strength in the manufacturing sector.

The pickup in March durable goods orders followed a revised 2.4 percent February gain, a Commerce Department report showed, and handily surpassed Wall Street economists' expectations for a 2.5 percent increase.

Even excluding transportation goods, which account for more than a quarter of overall orders, March orders were up 1.5 percent after declining 0.4 percent in February.

A key component of the monthly report that serves as a proxy for business investment, non-defense capital goods excluding aircraft, posted a 4.7 percent increase in orders last month.

It was the biggest increase since September 2004 when orders rose 7.9 percent and followed declines of 2.3 percent in February and 6.2 percent in January.

ANYTHING HELPS

"This is a helpful sign for the economy," said Kevin Flanagan, a fixed-income strategist for Morgan Stanley's global wealth management unit, based in Purchase, New York. "But it is too early to say whether or not capital expenditures are going to be back on the rebound just based on one month's data."

A mid-morning report from the Commerce Department on March new-home sales reinforced an impression the economy is laboring under a drag from a soft housing sector that may continue for some months.

New single-family home sales rose to an annual rate of 858,000 units from a revised rate of 836,000 in February but fell short of the 888,000 analysts had forecast for March.

Significantly, there were 545,000 new homes for sale in March, slightly more than the 544,000 reported in February, which economists said must be worked down to revive housing.

"It suggests continuing weakness in housing going forward for at least the next few months," said Gary Thayer, chief economists with A.G. Edwards & Sons Inc. in St. Louis, Missouri.

Kevin Logan, economist at Dresdner Kleinwort Wasserstein in New York, said the data showed the spring selling season had gotten off to a poor start. "We've already heard this from a lot of builders, but this confirms it," he said.

Bond prices that had weakened after the durable goods report was issued swiftly recovered after the housing data was published on hopes it kept the possibility of official interest rate cuts alive. Stock prices held on to modest gains at mid-morning.

The new-home sales data came a day after a real estate trade group reported the pace of existing home sales -- which represent 85 percent of the housing market -- slumped 8.4 percent in March, the biggest tumble in more than 18 years.

Other housing data on Wednesday was slightly more upbeat. A report from the Mortgage Bankers Association showed U.S. mortgage applications rose last week after five straight weekly declines, as lower loan rates fostered home purchases and refinancings.

POLICY-MAKERS WARY

Economists and Federal Reserve policy-makers have been closely monitoring business investment behavior, concerned that if companies cut back spending it could deepen a slowdown in national economic activity that began late last year.

"Non-defense capital goods excluding aircraft was up strongly at 4.7 percent, and as the best leading indicator of business investment, is an optimistic positive signal for this key component of GDP," said Alan Ruskin, chief international strategist with RBS Greenwich Capital in Greenwich, Conn.

The government is scheduled to issue its initial estimate of first-quarter gross domestic product on Friday, and analysts forecast it will show national economic growth slowed to a 1.8 percent rate from 2.5 percent in last year's fourth quarter.

New orders for transportation goods climbed 8.0 percent in March following a 10.2 percent rise in February. Orders for defense aircraft fell 48.8 percent last month after rising 24.5 percent in February.

Excluding defense items, March durables orders were up 4.5 percent following a 2.6 percent increase in February.