U.S. durable goods orders show surprising strength

WASHINGTON (Reuters) - New orders for long-lasting U.S. manufactured goods dipped last month but demand outside of transportation jumped and a gauge of business investment rose sharply, suggesting surprising strength in the factory sector.

The Commerce Department said on Wednesday orders for durable goods -- items intended to last three years or more -- fell 0.5 percent in April after a 0.3 percent decline in March. Wall Street economists had expected a 1 percent drop.

Orders for transportation equipment fell 8 percent as demand for civilian aircraft tumbled 24.4 percent. However, orders rose 2.5 percent with transportation stripped out, the biggest gain since July.

"The durable goods data fits into the perception that the economy is not as weak as has been widely feared," said Michael Darda, chief economist at MKM Partners LLC in Greenwich, Connecticut.

A closely watched proxy for business spending -- non-defense capital goods orders excluding aircraft -- rose a surprising 4.2 percent, the biggest gain since December.

The data provided a slight lift to stocks and the blue chip Dow Jones industrial average .DJI closed up 45 points, or 0.4 percent. Prices for U.S. government bonds fell and the dollar rose as the data supported traders' bets the Federal Reserve would raise interest rates later in the year.

The Fed has cut benchmark rates by 3.25 percentage points to 2 percent since mid-September to combat a deep housing slump and credit crunch that many economists feel may have knocked the economy into recession.

However, Fed officials have recently signaled a desire to move to the sidelines, and traders in interest-rate futures have priced in about a 50 percent likelihood rates could move higher by late October.

"The key to maintaining low inflation and inflation expectations is likely to be the timeliness and magnitude of decisions we make to reverse course," Minneapolis Federal Reserve Bank President Gary Stern said.

STRONG OVERSEAS DEMAND

Motor vehicle orders fell 3.3 percent, due to the sagging U.S. economy, which contributed to the weak demand for transportation goods.

However, electrical equipment orders surged 27.8 percent, the steepest increase on record, which analysts attributed to strong overseas demand that has been driven by a weak U.S. dollar. Machinery and primary metals orders also rose.

"The strength of global demand has greatly dampened the extent of the slowdown in manufacturing production, and in the light of today's orders numbers, it will continue to do so," said Nigel Gault, chief U.S. economist at Global Insight.

Shipments of durable goods rose 1.2 percent, the sharpest gain since January.

A separate report from the Mortgage Bankers Association showed that applications for U.S. home mortgages slipped for a second consecutive week last week as borrowing rates crept higher.

The trade group's index of mortgage application activity was at the lowest since the week ended April 25, suggesting tight credit conditions and falling home prices continued to depress the housing market.

Other reports showed sluggish retail sales.

The International Council of Shopping Centers and UBS Securities said their index of chain store sales was unchanged last week, with the year-on-year gain holding at 1.5 percent. Separately, Redbook Research said its sales index was up 1.7 percent over the last year.

"Consumers remain cautious in their discretionary spending as a result of the record high gasoline prices," Michael Niemira, ICSC chief economist, said in a statement.

(Additional reporting by Albert Yoon in New York and Alister Bull in Altoona, Wisconsin; Editing by Neil Stempleman)