Durable goods orders fall while business spending up

A woman shops for refrigerators at a store in New York July 28, 2010.

WASHINGTON (Reuters) - New orders for long-lasting manufactured goods fell unexpectedly for a second straight month in June, posting the largest drop since August in a sign economic recovery cooled in the second quarter.

However, the Commerce Department report on Wednesday showed cash-flush businesses continued to invest in equipment. That implied underlying demand remained intact with firms exhibiting confidence in the moderate economic recovery.

"The bottom line is that the data show business investment had a very strong second quarter and, although the recovery in manufacturing may be losing a little momentum, it is hardly collapsing," said Paul Ashworth, senior U.S. economist at Capital Economics in Toronto.

Durable goods orders dropped 1.0 percent after falling 0.8 percent in May, surprising financial markets that had expected a 1.0 percent increase. Durable goods include big-ticket items such as cars and planes.

But orders for non-defense capital goods excluding aircraft, a proxy for business spending, unexpectedly rose 0.6 percent after increasing by an upwardly revised 4.6 percent in May. Markets had expected a flat reading.

Stocks on Wall Street fell as investors focused on the overall decline in orders and a full-year earnings forecast from Boeing Co that was below market consensus.

The Standard & Poor's 500 Index fell for a second straight day, closing below its 200-day moving average, currently around 1,114.

Prices for safe-haven U.S. government debt rose and the dollar rallied against the euro but fell versus the yen.

Data from consumer spending to manufacturing have suggested the recovery from the longest and deepest recession since the 1930s took a step back in the past few months.

The government is expected to report on Friday that growth slowed to a 2.5 percent annual rate in the April-June period from a 2.7 percent pace in the first three months of the year.

A separate report from the Federal Reserve showed U.S. economic activity was still rising but at a subdued rate.

"Among those districts reporting improvements in economic activity, a number of them noted that the increases were modest, and two districts, Atlanta and Chicago, said the pace of economic activity had slowed recently," the Fed said in its Beige Book, which is based on conversations with business contacts across the nation.

BUSINESS INVESTMENT GROWING

Some analysts said there was a chance second-quarter growth could beat expectations given signs of strong business investment. With profits booming, companies have stepped up spending on equipment and software after aggressively cutting back during the recession.

"There has been a loss of momentum in the past two months. It's yet to be seen how much of the upward momentum from earlier this year has been reversed," said Jim O'Sullivan, chief economist at MF Global in New York. "(But) I think the trend toward improvement is still intact."

Durable goods orders are a leading indicator of manufacturing, which has benefited from businesses replenishing inventories drawn down to record lows during the recession. However, that effort appears to be running out of steam.

Economists had expected durable goods orders to rise last month because Boeing received 49 orders for civilian aircraft in June compared to only five in May.

But non-defense aircraft orders tumbled 25.6 percent after falling 30.2 percent in May. Analysts said most of Boeing's orders were too late in the month to be caught by the report.

The drag on orders also came from bookings for computers and electronic products, which saw their largest decline since October. Orders for machinery recorded their biggest decline in 14 months, while those for primary metals fell by the most since March 2009.

"We expect further moderation in durable goods orders as the inventory cycle fades over the second half of the year," said Yelena Shulyatyeva, an economist at BNP Paribas in New York.

Durable goods shipments, which go into the calculation of gross domestic product, fell 0.3 percent after sliding 0.7 percent in May.

The Mortgage Bankers Association said on Wednesday that demand for loans to buy homes rose for the second straight week last week to the highest level since the end of June, but hovered just above 13-year lows.

(Editing by Kenneth Barry)