U.S. business spending plans gauge hits one-year high

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By Lucia Mutikani | February 28, 2013 5:14 AM EST

A gauge of planned U.S. business spending recorded its largest increase in just over a year in January, suggesting businesses may be becoming more confident about expanding, while another report on Wednesday indicated the housing market is continuing to strengthen.

Orders for capital goods, excluding defense-related items and aircraft, a closely watched proxy for business spending plans, jumped 6.3 percent, the biggest gain since December 2011. Orders for so-called core capital goods had slipped 0.3 percent in December.

In other data, contracts to buy previously owned homes approached a near three-year high last month. Housing is expected to underpin U.S. economic growth this year.

"The encouraging tone of this report suggests that the business sector is beginning to feel sufficiently confident about the improving economic outlook to commit to investment activity," said Millan Mulraine, a senior economist at TD Securities in New York.

Economists had expected core capital goods orders to rise only 0.2 percent.

In a separate report, the National Association of Realtors said its pending home sales index increased 4.5 percent to the highest level since April 2010 - just before the expiration of the home-buyer tax credit.

The rise in signed contracts, which become sales after a month or two, added to data such as building permits and home prices that have suggested a decisive turnaround in the housing market.

Housing is no longer a drag on the economy and home building added to growth last year for the first time since 2005.

Still, the reports are unlikely to change the Federal Reserve's very easy monetary policy stance. Fed Chairman Ben Bernanke, testifying before Congress for a second straight day, pointed to the pick up in housing as a sign the U.S. central bank's aggressive easing of monetary policy is having traction.

However, he signaled a willingness to press forward with efforts to spur an even stronger recovery and lower the jobless rate, which remains at a lofty 7.9 percent.

U.S. stocks pushed higher on the data, with the Standard & Poor's 500 index rising more than 1.0 percent. The U.S. dollar weakened against a basket of currencies, while prices for U.S. government debt were little changed though.

FACTORY ACTIVITY COOLING

Business spending regained its footing in the fourth quarter after slipping in the prior period.

Although shipments of core capital goods, used to calculate equipment and software spending in the gross domestic product report, fell last month, economists were little worried.

"The balance between orders and shipments of capital goods is looking healthier as backlogs of core capital goods orders rose for the first time in eight months," said John Ryding, chief economist at RDQ Economics in New York.

"Our take is that manufacturing activity - especially in the capital goods area - is bouncing back after cautious behavior ahead of the fiscal cliff."

Factory activity has cooled in recent months after helping to lift the economy from the 2007-09 recession. Sluggish domestic demand, tighter fiscal policy and slowing global growth are holding back manufacturing.

The Commerce Department report also showed overall orders for durable goods - items ranging from toasters to aircraft that are meant to last at least three years - tumbled 5.2 percent as demand for civilian and defense aircraft collapsed. Last month's drop was the first since August.

Orders for civilian aircraft dived 34 percent.

Boeing received orders for only 2 aircraft, down from 183 in December. The decline in orders was probably not related to the grounding of Boeing's 787 Dreamliners after problems with overheating batteries.

Aircraft orders are very volatile and typically tend to fall at the start of the year.

"I haven't heard any reports about airlines canceling their orders. This could be a one-month lull rather than something greater," said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Connecticut.

Defense aircraft orders plunged 63.8 percent after soaring 58.5 percent in December, likely as orders were pushed forward ahead of $85 billion in government-wide spending cuts.

Defense capital goods orders plummeted 69.5 percent in January, the sharpest fall since July 2000. Orders for motor vehicles were flat.

The spending cuts, which are part of a plan to reduce the budget deficit, are set to kick in on Friday unless Congress and the Obama administration come up with a last-minute deal. Defense will bear much of the cuts.

But durable goods orders excluding transportation increased 1.9 percent last month, also the largest gain since December 2011, after increasing 1 percent in December. That was a sign factory activity continues to plod along.

Orders for machinery notched their largest increase since May 2010. There were also gains in orders for fabricated metal products and electrical equipment and appliances.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)

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