February 4, 2020 / 3:22 PM / 20 days ago

WRAPUP 2-Defense aircraft demand lifts U.S. factory orders; underlying softness remains

(Adds details, analyst comments, updates markets)

* Factory orders increase 1.8% in December

* Shipments of factory orders rise 0.5%

* Factory goods orders drop 0.6% in 2019

By Lucia Mutikani

WASHINGTON, Feb 4 (Reuters) - New orders for U.S.-made goods increased by the most in nearly 1-1/2 years in December, flattered by robust demand for defense aircraft, but persistently weak business spending on equipment pointed to limited scope for a sharp rebound in manufacturing.

The report from the Commerce Department on Tuesday followed on the heels of a survey from the Institute for Supply Management on Monday showing manufacturing activity rebounded in January after contracting for five straight months.

The business investment downturn could be compounded by Boeing's suspension last month of production of its troubled 737 MAX jetliner, grounded last March after two fatal crashes, and the coronavirus outbreak, which has killed hundreds in China and infected thousands globally. These events are seen disrupting supply chains.

"The strength in (factory orders) is a little misleading," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania. "Fundamentals haven't improved significantly for either manufacturing or real business equipment spending."

Factory goods orders surged 1.8% in December, the largest gain since August 2018. Data for November was revised down to show orders tumbling 1.2% instead of dropping 0.7% as previously reported. Excluding defense, factory orders dropped 0.6% in December after edging up 0.1% in the prior month.

Economists polled by Reuters had forecast factory orders would increase 1.2% in December.

Factory orders fell 0.6% in 2019. While business sentiment has improved as trade tensions between the United States and China have eased, confidence remains subdued. Washington and Beijing signed a Phase 1 trade deal last month, but U.S. tariffs on $360 billion of Chinese imports, about two-thirds of the total, remained in place.

Underlying weakness in manufacturing was underscored by a 0.5% jump in inventories at factories in December. That was the biggest increase in factory inventories since last January and followed a 0.3% rise in November.

The inventory bloat indicates sluggish sales at factories, though shipments increased 0.5% in December, the most since September 2018. Unfilled orders at factories were unchanged.

U.S. stocks rose for a second straight day as measures by the Chinese government to contain the coronavirus and limit its economic fallout lifted demand for riskier assets. The dollar firmed against a basket of currencies, while U.S. Treasury prices fell.

BOEING, CORONAVIRUS DRAG

The 18-month-long U.S.-China trade war has pressured business confidence and undercut capital expenditure. Business investment contracted in the fourth quarter for the third straight quarter, the longest such stretch since 2009.

Economists estimate Boeing's biggest assembly-line halt in more than 20 years could slice at least half a percentage point from first-quarter GDP growth. The U.S. economy grew 2.3% in 2019, the slowest in three years, after expanding 2.9% in 2018.

The coronavirus outbreak could hurt global growth, which has been stabilizing after declining since mid-2018. It is seen disrupting the supply chain for technology companies like Apple which source their components from China.

"The toll on U.S. manufacturing production is likely to be borne most heavily in the computer and electronics industry given its reliance on Chinese-made inputs as well as its relatively high share of industrial production," said Sarah House, a senior economist at Well Fargo Securities in Charlotte North Carolina.

Transportation equipment orders surged 7.9% in December, the biggest increase since August 2018, after plunging 8.2% in the prior month. Orders were boosted by a 168.3% jump in demand for defense aircraft and parts, which offset a 74.7% tumble in orders for civilian aircraft and parts. Motor vehicle and parts orders increased 0.5% in December.

But machinery orders fell 1.0% in December after dropping 1.2% in November. Orders for electrical equipment, appliances and components orders decreased 0.3% in December.

The government also said orders for non-defense capital goods excluding aircraft, which are seen as a measure of business spending plans on equipment, dropped 0.8% in December instead of deceasing 0.9% as reported last month.

Shipments of core capital goods, which are used to calculate business equipment spending in the gross domestic product report, declined 0.3% in December, rather than falling 0.4% as previously reported. (Reporting by Lucia Mutikani Editing by Paul Simao)

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