A gauge of US business investment spending plans rose in May in a tentative sign of stabilisation in the manufacturing sector, which has been weak since the late summer of 2014. But the lingering effects of lower oil prices and a strong dollar will continue to constrain factory activity for a while, economists say. Other data on Tuesday showed new home sales increased to a more than seven-year high in May.
Manufacturing is lagging an overall rebound in the economy after output slumped at the start of the year. Despite the weakness in factory activity, the Federal Reserve is expected to raise interest rates this year. The Commerce Department said on Tuesday non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, rose 0.4 percent last month. These so-called core capital goods orders slipped 0.3 percent in April.
"These are encouraging signs ... we need to see further gains over the next couple of months before we can more firmly conclude that manufacturing orders are rebounding," said John Ryding, chief economist at RDQ Economics in New York. US stock indexes were trading higher and the dollar firmed against a basket of currencies. Prices for US Treasuries fell.
Manufacturing, which accounts for about 12 percent of the US economy, has been hurt by the strong dollar and investment spending cuts in the energy sector in the aftermath of a more than 60 percent plunge in crude oil prices last year. The number of US oil drilling rigs has dropped to near five-year lows, prompting oilfield companies like Schlumberger and Halliburton to slash their capital expenditure budgets for this year.
However, the pace of decline in oil rig counts has slowed in recent weeks as crude prices edged higher. The dollar has gained about 12 percent against the currencies of the United States' main trading partners since June 2014, taking a bite out of the profits of multinational corporations. Factories also have been hampered by businesses placing fewer orders while working through a stockpile of goods accumulated last year.
In a second report, the Commerce Department said new home sales rose 2.2 percent to a seasonally adjusted annual rate of 546,000 units in May, the highest level since February 2008. April's sales pace was revised sharply higher. The report came on the heels of data on Monday showing home resales in May surged to a 5-1/2-year high.
Data last week also showed building permits at near an eight-year peak in May and homebuilders were the most optimistic in nine months in June. The bullish new home sales report added to strong retail sales, consumer sentiment and employment data in suggesting the economy was gaining speed in the second quarter after gross domestic product contracted in the first three months of 2015.
Fed Governor Jerome Powell said on Tuesday the economy was likely to strengthen in the second half of the year and could be ready for a rate hike in September and a second increase in December. Last month, shipments of core capital goods, which are used to calculate equipment spending in the government's GDP measurement, rose 0.3 percent after a similar gain in April.
A 6.4 percent drop in transportation equipment, however, weighed down overall orders for durable goods - items ranging from toasters to aircraft that are meant to last three years or more - which fell 1.8 percent last month. That was because of a 35.3 percent plunge in civilian aircraft orders. Boeing reported on its website that it had received 11 aircraft orders last month, a drop from 37 in April. It was the second straight monthly decline in transportation orders.
The weakness in manufacturing is likely far from over, with order books continuing to shrink last month. Unfilled orders for long-lasting manufactured goods fell 0.5 percent in May. They have declined in five of the last six months. Inventories of these goods dropped in May after 23 straight months of increases, suggesting restocking could be a drag on second-quarter growth. In a third report, financial data firm Markit said its preliminary US Manufacturing Purchasing Managers' Index fell to a reading of 53.4 in June, the lowest since October 2013, from 54 in May. A reading above 50 indicates expansion in factory activity.
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