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U.S. factory orders data eases economic slowdown fears

By Lucia Mutikani

WASHINGTON (Reuters) - New orders for U.S. factory goods outside of the volatile transportation sector rose for a third straight month in December, easing concerns of an abrupt slowdown in manufacturing activity.

The Commerce Department said on Tuesday that non-transportation orders gained 0.2 percent last month after rising 0.3 percent in November and 0.1 percent in October.

The gain suggested the factory sector was positioned to withstand what appears to be partly a weather-related slowdown. A report on Monday showed factory activity dived to an eight-month low in January, spooking investors.

"Manufacturing will expand at roughly the same pace as the overall economy in 2014," said Gus Faucher, a senior economist at PNC Financial Services in Pittsburgh. "Consumers are gradually increasing their spending, business investment is picking back up again, supporting spending on capital goods."

Overall factory orders, however, dropped 1.5 percent, the largest fall since July, weighed down by a plunge in bookings for transportation equipment. New orders increased 1.5 percent in November and economists had expected a 1.7 percent drop.

Transportation orders are notoriously volatile, and economists frequently strip them out to get a better view of underlying trends.

New orders for transportation equipment tumbled 9.7 percent last month, the largest drop since July, after increasing 8.1 percent in November. Non-defense aircraft and parts orders fell 17.5 percent, while orders for motor vehicles fell by 1.5 percent, the most in five months.

Helping to take the sting out of the decline, orders for non-defense capital goods excluding aircraft - seen as a measure of business confidence and spending plans - fell only 0.6 percent, less than half of what the government said last week.

Order backlogs also continued their steady rise, reaching their highest level since the government started tracking them in 1992.

"Today's report shows slightly less weakness in the underlying trend," said Tim Quinlan, an economist at Wells Fargo Securities in Charlotte, North Carolina.

SLOWDOWN FEARS

The report on Monday from the Institute for Supply Management had shown the largest drop in orders in more than 30 years. That helped ignite fears of a cooling in manufacturing and hit stocks hard. The sector makes up about 12 percent of the economy and has been one of the main pillars of growth.

Economists said the ISM data, which is based on a sentiment survey, had been running very strong relative to so-called hard data such as industrial production and the government's gauge of orders.

The latest data helped narrow that gap, while showing the sector still poised for expansion, Quinlan said.

"Growth continues at a moderate pace, underscored by the recent trend of core orders," he said.

Factory output grew at its fastest rate in nearly two years in the fourth quarter and some slowdown is expected this quarter as businesses hold the line on inventories after rapidly accumulating stocks in the second half of last year.

That will help hold back economic growth after a brisk 3.7 percent annual pace of expansion in the last half of 2013.

There is little sign, however, that an inventory correction is looming. In December, inventories at the nation's factories increased 0.5 percent after nudging up 0.1 percent in November.

"Though inventory investment contributed importantly to GDP growth in 2013, there is no evidence that inventory accumulation in the factory sector has been excessive as the inventory-to-shipment ratio has essentially been flat over the last two and a half years," said John Ryding, chief economist at RDQ Economics in New York.

The inventory-to-shipment-ratio was a still-lean 1.29 in December, up from 1.28 in November.

(This story has been filed again to change the day of the week to Monday from Tuesday in 3rd and 11th paragraphs)

(Reporting by Lucia Mutikani; Editing by Tim Ahmann and Paul Simao)

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