Factory orders rebound in May as shipments edge up

WASHINGTON (Reuters) - New orders received by factories bounced back in May, pointing to underlying strength in manufacturing as demand for transportation equipment and a range of other products rose.

The Commerce Department said on Tuesday that orders for manufactured goods rose 0.8 percent after a 0.9 percent fall in April. Economists had forecast a 1.0 percent rebound.

Manufacturing activity, which has led the economic recovery, has been dampened by supply chain disruptions from the March earthquake in Japan. But recent data, including the Institute for Supply Management’s June survey of factory activity released on Friday, suggests activity is normalizing.

“The shock from Japan is starting to ease, the question is how big is the bounce back going to be in the second half and when are we going to get the full impact,” said Neil Dutta, an economist at Bank of America Merrill Lynch in New York.

“It’s probably going to happen later in the third quarter.”

The economy appears on the cusp of regaining momentum after slowing abruptly in the first half of the year. However, a report on June employment due on Friday is expected to show continued weakness in the labor market.

The Commerce Department report showed orders excluding transportation edged up 0.2 percent in May after a similar gain the prior month.

Unfilled orders rose 0.9 percent, the biggest increase since September, after a 0.6 percent gain in April.

The rise in unfilled orders highlighted the supply disruptions from Japan and suggested factories will have to ramp-up production to clear the backlog.

Shipments edged up 0.1 percent after falling 0.4 percent in April. Inventories increased 0.8 percent in May to $593.0 billion, the highest level since the series started in 1992.

The department said orders for durable goods, pricey manufactured products expected to last three years or more, rose 2.1 percent, marking an upward revision from the 1.9 percent reported last month.

However, the increase in orders for non-defense capital goods excluding aircraft -- seen as a measure of business confidence and spending plans -- was unrevised at 1.6 percent, although shipments of those goods were revised to a 1.8 percent gain from 1.4 percent.

The positive impact of these shipments on second quarter gross domestic product was offset by a fall in inventories of manufactured nondurable goods.

“The weakness reported in nondurable inventories adds some downside risk to our forecast for second quarter GDP growth,” said Daniel Silver, an economist at JPMorgan in New York.

“However, less inventory accumulation in the second quarter could mean that the contribution from inventories in the third quarter may be stronger than anticipated.”

Second-quarter GDP growth estimates range between 1.5 percent and 2 percent annual rate. The government issues its first reading on second quarter growth on July 29.

Reporting by Lucia Mutikani; Editing by Andrew Hay