Orders for big-ticket items surge, housing data mixed

on June 24 2009 2:40 PM

An unexpected jump in U.S. durable goods orders last month backed hopes that the economy was healing, but news from the hard-hit housing market remained mixed.

New orders for long-lasting U.S. manufactured goods rose by a much stronger-than-expected 1.8 percent in May, Commerce Department data on Wednesday showed.

Analysts polled by Reuters had forecast durable goods orders would decline 0.6 percent last month.

May's increase, the third gain in 4 months, followed a revised 1.8 percent gain in April.

U.S. stocks opened higher after the durable goods data, while U.S. government bond prices fell, although trading was also somewhat overshadowed by a Federal Reserve policy statement due later.

The economy is bottoming here, and we're looking for the Fed to maybe change its statement slightly and maybe start to suggest a more neutral balance of risk. A nod, basically, to an exit strategy, said Kim Rupert at Action Economics LLC in San Francisco.

The Fed is due to deliver its policy decision about 2:15 p.m. EDT. It is expected to leave interest rates unchanged in a range between zero and 0.25 percent, and many economists think it will lean against rate hike speculation by emphasizing they will stay low for an extended period.

The U.S. central bank is also likely to stress the economy remains fragile, although acknowledging signs that activity is picking up here and there.

FACTORY BOOST

Manufacturing, which accounts for about one-third of the economy, provides a good barometer for overall business health, and the May durable goods orders report showed solid gains.

New orders excluding transportation advanced 1.1 percent last month, compared with a forecast for a 0.4 percent decline, buoyed in part by a 7.7 percent rise in new machinery orders. This was the largest percentage increase in that category since March 2008, the Commerce Department said.

New orders excluding defense were 1.4 percent higher, versus a Reuters' poll prediction for a 0.4 percent drop.

More importantly, non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, jumped 4.8 percent in May, the largest gain since September 2004. May's sharp rise compared with forecasts for a 0.6 percent drop and after a revised 2.9 percent April fall.

The numbers point to a stabilization, but certainly not a robust recovery, said Keith Hembre, chief economist at First American Funds in Minneapolis.

HOUSING

A still-weak economy was also illustrated by a new single-family home report released later by the Commerce Department, which showed sales slipping 0.6 percent last month to a 342,000 annual pace.

Economists polled by Reuters had forecast sales would notch a 360,000 rate. Last month's pace also remained far below the 509,000 level of May 2008.

The overall level of sales is still very soft. Buyers may still be reluctant to step up with prices still edging downward. We're stabilizing, but we still have some hurdles to overcome before we see a solid recovery in housing, said Gary Thayer, senior economist at Wells Fargo Advisors, St. Louis.

The median sales price rose to $221,600 from $212,600 in April and was the highest since December, when it was $229,600. The median marks the half-way point, with half of all houses sold above that level and half below.

Economists believe the U.S. housing market will not begin to recover until home prices fall far enough to stimulate demand that will whittle down the overhang of unsold homes.

A separate report showed that U.S. mortgage applications climbed last week from a seven-month low, the Mortgage Bankers Association said.

Demand for home loans rose after four straight weekly declines, as U.S. mortgage rates dipped and more borrowers applied to buy houses as well as refinance.

The trade group's seasonally adjusted mortgage applications index, which includes both purchase and refinance loans, rose 6.6 percent last week.

(Additional reporting by Rachel Chang in New York; Editing by Neil Stempleman)

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