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WRAPUP 2-U.S. business investment weak; consumer confidence at five-month high

(Adds consumer confidence data, analyst comments, updates markets)

* Core capital goods orders fall 0.9% in December

* Core capital goods shipments drop 0.4%

* Durable goods orders increase 2.4%

* Consumer confidence rises 3.4 points to 131.6 in January

WASHINGTON, Jan 28 (Reuters) - New orders for key U.S.-made capital goods dropped by the most in eight months in December and shipments were weak, suggesting business investment contracted further in the fourth quarter and remained a drag on economic growth.

For now, however, the longest economic expansion on record looks set to continue, with other data on Tuesday showing consumer confidence surged to a five-month high in January amid optimism over the labor market. That suggests consumer spending could stay fairly strong in the near term and blunt some of the hit on the economy from weak business investment.

Business spending has remained weak even as the Federal Reserve cut interest rate cuts three times last year. Officials from the U.S. central bank started a two-day policy meeting on Tuesday. They are expected to reiterate the Fed’s desire to keep rates unchanged at least through this year.

Weak business investment and the resulting slump in manufacturing have been on the radar of Fed officials who have blamed trade tensions, especially the White House’s 18-month trade war with China, and an uncertain global economic growth outlook for the malaise.

Though tensions have eased with the signing this month of a “Phase 1” trade deal between Washington and Beijing, Boeing continues to loom over manufacturing. Boeing this month suspended production of its troubled 737 MAX jetliner, which was grounded last March following two fatal crashes.

“Manufacturing is clearly losing momentum as many of the most extreme tariffs on supply-chain inputs factories need to produce their final goods remain in place,” said Chris Rupkey chief economist at MUFG in New York. “When it comes to forecasting the economy in 2020, it’s the consumer stupid.”

The Commerce Department said orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, fell 0.9% last month as demand for machinery, primary metals and electrical equipment, appliances and components declined. That was the largest decrease since April.

Data for November was revised lower to show these so-called core capital goods orders edging up 0.1% instead of gaining 0.2% as previously reported. Economists polled by Reuters had forecast core capital goods would be unchanged in December.

Core capital goods orders rose 0.8% in 2019. Shipments of core capital goods decreased 0.4% last month. Core capital goods shipments are used to calculate equipment spending in the government’s gross domestic product measurement. They declined by an unrevised 0.3% in November.

Business investment has contracted for two straight quarters and was likely stuck in the red in the fourth quarter. The latest data also suggest a recovery is unlikely soon.

The Atlanta Fed is forecasting GDP to rise at a 1.9% annualized rate in the fourth quarter. The economy grew at a 2.1% rate in the July-September period. The government will publish its snapshot of fourth-quarter GDP on Thursday.

In a separate report on Tuesday, the Conference Board said its consumer confidence index increased 3.4 points to a reading of 131.6 in January, the highest reading since August. Economists expected a temporary drop in consumer confidence in February because of the deadly coronavirus, which has killed more than 100 people in China, with cases reported in some countries including the United States, France and Japan.

The survey’s so-called labor market differential, derived from data on respondents’ views on whether jobs are plentiful or hard to get, increased to 37.4 this month from 33.5 in December.

That measure closely correlates to the unemployment rate in the Labor Department’s employment report. Though the labor market remains strong, there are signs that momentum is slowing. Job growth cooled in December and vacancies recorded their biggest drop in more than four years in November.

“The good news is that a drop in confidence is unlikely by itself to cause a significant drop in consumer spending,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.

The dollar firmed against a basket of currencies as concerns about the economic fallout from the coronavirus outbreak boosted demand for safe-haven currencies. Stocks on Wall Street were trading higher, while U.S. Treasury prices fell.

MANUFACTURING SLUMP

The U.S.-China trade war has hurt business confidence, undercutting capital expenditure and pushing manufacturing, which accounts for 11% of the economy, into recession.

Boeing’s biggest assembly-line halt in more than 20 years is expected to wreak havoc with the supply chain. The plane maker’s largest supplier, Spirit AeroSystems Holdings, announced early this month that it planned to lay off more than 20% of the workforce at its Wichita, Kansas base.

Economists estimate the production suspension could slice at least half a percentage point from first-quarter GDP growth. The hit to GDP growth would come from a smaller inventory build. Though airlines have continued to submit orders there have been no deliveries, leading to a rise in inventories at factories.

In December, overall orders for durable goods, items ranging from toasters to aircraft that are meant to last three years or more, rebounded 2.4% after tumbling 3.1% in the prior month.

They were boosted by a 7.6% surge in orders for transportation equipment, the largest increase since August 2018, which followed an 8.3% drop in November.

Orders for defense aircraft and parts soared 168.3% last month, offsetting a 74.7% plunge in demand for civilian aircraft. Boeing reported on its website that it had received only three commercial aircraft orders in December, down from 63 in November. December is normally a strong month for aircraft orders. Motor vehicles and parts orders fell 0.9% in December.

“Business spending is set to remain weak in the coming quarters,” said Sarah House, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

Reporting by Lucia Mutikani Editing by Paul Simao

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