BA Boeing Co

By Anna Louie Sussman 

WASHINGTON -- Demand for long-lasting factory goods rebounded in July, a sign the manufacturing sector could continue to stabilize in the second half of the year.

Much of the uptick was due to civilian aircraft orders, but orders for core capital goods -- the kind of business investment that has been conspicuously absent for the past few years -- -- posted their largest gain since January, suggesting firms may finally feel comfortable making the large-scale investments that signal confidence in future demand.

New orders for durable goods -- aircraft, industrial machinery, and other products designed to last at least three years -- rose a seasonally adjusted 4.4% in July from the prior month, the Commerce Department said Thursday, the largest monthly jump since October. Economists surveyed by The Wall Street Journal had expected a rise of 3.2%.

A closely watched proxy for business investment, new orders for nondefense capital goods excluding aircraft, rose for the second-straight month, up 1.6% from June.

Back-to-back months of rising orders in this category are "an encouraging sign that business capital investment activity might be on the verge of a long-awaited rebound," said Millan Mulraine, deputy chief U.S. macro strategist at TD Securities USA LLC.

"The sharp rise in core orders and modest gain in inventories to start the quarter suggest that business investment will likely provide a modest boost to the economic recovery," he said.

Investment in capital goods, such as machine tools or robotics equipment, is a key ingredient in boosting workers' wages and productivity, as well as corporate profits. Productivity, or output per hour worked, fell in the second quarter for the third consecutive period, the longest streak of falling productivity since 1979.

But other economists cautioned against reading too much into the short stretch of increased investment. Orders in that category were still down 4.3% over the first seven months of the year, compared with the same period a year before.

"While I am hopeful, it is more of a light at the end of the tunnel thing than a watershed moment," said Stephen Stanley, chief economist at Amherst Pierpont Securities. "I am looking for business equipment spending to continue declining for the rest of this year, reflecting election uncertainty as well as the longstanding soft backdrop."

July's rise was led by more robust demand for transportation equipment, orders of which rose 10.5%. That was driven by the volatile civilian aircraft and parts category, which showed a 89.9% increase in orders over the month. Separate data from Boeing Co., the largest aerospace company in the U.S., showed 73 orders for large jets in July, up from 12 in June.

The data suggest the manufacturing sector is firming in the second half of the year, coming on the heels of other recent reports suggesting the U.S. manufacturing sector stabilized in July. A Federal Reserve report showed manufacturing output posted its largest monthly advance in a year in July. And the Institute for Supply Management's gauge showed manufacturing activity expanding in July for the fifth-straight month.

The latest report reflects the first full month of durable goods data since the United Kingdom voted to leave the European Union in late June. After the vote, the dollar strengthened further against the British pound and euro, but it has fallen again since the end of July.

Orders for durable goods excluding the transportation category rose 1.5% from June, and orders excluding defense rose 3.8% last month. Data on durable-goods orders can be uneven from month to month and are often revised.

June's figures for overall new orders were revised to a 4.2% decline, from an earlier estimate of a 3.9% decrease. Through the first seven months of the year, durable goods orders were down 0.9%, compared with the same period in 2015.

After steadily climbing in the first few years of the recovery, manufacturing output has mostly flattened in the past two years. A sharp drop in oil prices curbed new investment in the energy sector, and a strengthening dollar made U.S.-made goods more expensive for overseas buyers. Still, steady hiring and low interest rates have stoked domestic appetite for some durable items, such as cars, helping counter the lack of capital investment and foreign demand.

But consumer demand can only go so far in spurring economic growth. Thursday's report showed orders for motor vehicles and parts were flat in July.

Federal Reserve officials, who gather with other central bankers this week for an annual conference in Jackson Hole, Wyo., face the possibility the U.S. economy is stuck in a "new normal" of low growth and productivity.

Demand for machinery rose 1.6%. Orders for computers and electronic products posted their largest increase since March 2015, up 3.6%.

Shipments of durable goods rose 0.2% during the month, but are down 1.1% compared with shipments in the first seven months of last year.

Write to Anna Louie Sussman at anna.sussman@wsj.com

(END) Dow Jones Newswires

August 25, 2016 12:52 ET (16:52 GMT)

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