Factories Help Lead U.S. Economy Out of Slump as Orders Rise

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U.S. Durable Goods Demand Falls 0.5% in April

Consecutive gains in orders for capital equipment signal American factories, and the economy, are starting to crawl out of a first-quarter slump.

An index that is a proxy for future corporate spending -- bookings for non-military capital goods excluding aircraft -- advanced 1 percent in April after rising 1.5 percent the prior month, according to Commerce Department data issued Tuesday in Washington. Other reports showed the housing market is gaining traction and consumers are feeling a little more confident.

Machinery makers saw the biggest improvement in demand in eight months, indicating more seasonable temperatures and the easing of delays at West Coast ports are ameliorating the damage at one of the hardest-hit producers. A still-strong dollar and relatively low oil prices mean exports and business investment in drilling equipment will be slower to rebound and suggests assembly lines won’t be going full speed soon.

“The worst is probably behind us,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “It’s not a vigorous rebound, but it is getting better.”

Stocks fell the most in three weeks and the spread between short- and long-term Treasury securities narrowed as the better-than-forecast economic data and comments by Federal Reserve officials bolstered bets for an interest-rate increase this year. The Standard & Poor’s 500 Index declined 1 percent to 2,104.2 at the close in New York.

Durable Goods

The Commerce Department’s report on orders showed total bookings for durable goods, those meant to last at least three years, declined 0.5 percent in April, matching the median forecast of economists surveyed by Bloomberg. They were depressed by a pullback in procurement from the military. Excluding defense, orders increased 0.2 percent last month.

Shipments for non-defense capital goods excluding aircraft, which is used in calculating gross domestic product, also showed strength, rising 0.8 percent after increasing 1 percent in March.

“Without question, this is an extremely strong report, if you think about how the year started,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC in New York. “You’re looking at a pretty nice profile for growth.”

Economists at Barclays Plc in New York boosted their tracking estimate for second-quarter growth to 2.7 percent after the report from 2.5 percent. The world’s largest economy barely grew in the first three months of the year, according to an initial estimate, and recent data indicate that revised figures due Friday will probably show it actually contracted.

Home Sales

After a slow start to the year because of bad weather, housing also is making progress. Purchases of new homes rose more than projected in April, a sign this part of the market is picking up steam during the busiest selling period of the year.

Sales increased 6.8 percent to a 517,000 annualized pace from a 484,000 rate in the prior month, according to another report from the Commerce Department. The median forecast of 70 economists surveyed by Bloomberg called for 508,000. Prices picked up and inventory was little changed.

Steady hiring, low borrowing costs and a limited supply of existing homes are helping lift demand for new properties. Housing-related companies from PulteGroup Inc. to Home Depot Inc. have said the spring selling season is off to a good start, and the brighter outlook for sales may spur more residential construction, which would contribute to economic growth.

Slow Rebound

“Housing is coming back after a bad winter period,” said Robert Brusca, president of Fact & Opinion Economics in New York, whose forecast for sales was among the closest of economists surveyed by Bloomberg. “There’s going to be an improving housing market, but a slowly improving one.”

Also Tuesday, the S&P/Case-Shiller index of property values in 20 cities increased 5 percent in March from the same month last year, the group said. Nationally, prices rose 4.1 percent from March 2014.

Americans’ appetite for new cars has been a constant for factories. Orders for automobiles climbed 0.3 percent last month after a 4.2 percent gain in March, the Commerce Department’s figures showed. General Motors Co. is among automakers with plans to invest. The Detroit-based company said it will spend $439 million to build a new paint shop at its Corvette sports car plant in Bowling Green, Kentucky.

Business Investment

The investment, which is part of a plan to spend $5.4 billion on U.S. factories, includes a 450,000-square-foot paint facility, almost half the size of the current assembly plant, GM said in a statement May 21.

Cars and light trucks sold at a 16.5 million annualized rate in April following a 17.1 million pace the previous month, according to Ward’s Automotive Group. That still exceeded the 16.4 million average in 2014.

One reason demand for automobiles continues to improve is that households remain relatively confident. The Conference Board’s consumer sentiment index advanced to 95.4 in May from a revised April reading of 94.3, the New York-based private research group said Tuesday.

Higher home values, near-record stock prices and a stronger job market have helped stabilize confidence even in the face of rising gasoline prices. A sustained pickup in wage growth is probably needed to propel consumer spending after a first-quarter setback.

“When I look at the confidence numbers, I’m seeing more strength than the current consumer spending numbers show,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York. “When you look at the backdrop for spending -- not just confidence but also income and wealth -- they’re all suggesting there should be more spending.”

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