(Updates with closing stock prices in eighth paragraph.)
Feb. 27 (Bloomberg) -- Orders for U.S. durable goods excluding transportation equipment climbed in January by the most in a year, showing companies are planning to expand capacity as they look beyond the budget impasse in Washington.
Bookings for items meant to last at least three years minus things such as aircraft climbed 1.9 percent, exceeding all forecasts of economists surveyed by Bloomberg and the biggest gain since December 2011, according to data from the Commerce Department issued today in Washington. Another report showed pending sales of existing homes jumped more than forecast.
Demand for machinery such as construction equipment and generators jumped by the most in more than two years last month, indicating companies were relieved the U.S. avoided the brunt of the so-called fiscal cliff of tax increases and budget cuts slated to take effect at the start of the year. Growing demand from abroad will probably supplement gains in investment to ensure manufacturing keeps contributing to economic growth.
“We expect the economy to perform better in the second half of the year and firms are gearing up for that,” said Michael Carey, chief economist at Credit Agricole CIB in New York. “Plus, it’s a good time to make capital expenditures since interest rates are so low.” Carey is the best forecaster of durable goods excluding transportation for the past two years, according to data compiled by Bloomberg.
Capital goods orders excluding defense and aircraft jumped 6.3 percent in January, the most since December 2011, today’s report showed. They are considered a proxy for future business investment in items such as computers, engines and communications gear. They have climbed 9.5 percent since October, the biggest three-month gain since 1993.
Machinery bookings surged 13.5 percent in January from the prior month, the most since May 2010.
“While we’re not forecasting a strong upswing in growth this year, we do think we’re coming off the lows based on what we see in orders so far and what we hear from customers,” Michael Larsen, chief executive officer of Gardner Denver Inc., said during a Feb. 22 earnings call. The Wayne, Pennsylvania- based company makes compressors and pumps.
Stocks climbed for a second day on the brightening economic outlook. The Standard & Poor’s 500 Index rose 1.3 percent to 1,515.99 at the close in New York. The S&P Supercomposite Machinery Index, which includes companies such as Caterpillar Inc. and Deere & Co., jumped 2.1 percent.
Part of the improving prospects reflects stabilization in Europe. Economic confidence in the euro area increased more than economists forecast in February, adding to signs that the 17- nation currency bloc may be emerging from a recession, data from the European Commission in Brussels showed said today.
Total orders for durable goods slumped 5.2 percent in January, the first decline since August, today’s Commerce Department report showed. The median forecast of 78 economists surveyed by Bloomberg projected a 4.8 percent decrease.
Estimates ranged from a decline of 8.3 percent to a gain of 3 percent. Last month’s drop followed a 3.7 percent gain in December that was initially reported as 4.3 percent.
The total was held back by a 69.5 percent slump in defense bookings, the biggest drop since July 2000. Demand for military aircraft and parts slumped 63.8 percent following a 58.5 percent surge the prior month.
While these orders are volatile, they highlight the risk that across-the-board budget cuts, known as sequestration, represent for the U.S. economy. About $1.2 trillion in reductions over the next decade are scheduled to start taking effect in two days.
“There is still some concern about the impact of the sequester,” said Credit Agricole’s Carey. “There could be knock-on effects that we’re not quite sure on.”
The housing rebound in the U.S. will probably also lift manufacturers. Contracts to purchase previously owned homes climbed more than forecast in January, a sign the industry will keep strengthening this year.
The index of pending sales of existing houses increased 4.5 percent to 105.9, the highest level since April 2010, a report from the National Association of Realtors showed today in Washington. The median forecast in a Bloomberg survey called for a 1.9 percent advance.
Mortgage rates close to a record low and gains in employment are bringing more people into the market. Faster hiring and fewer foreclosures would ensure a more sustained rebound in housing, boosting its contribution to the world’s largest economy.
“Favorable affordability conditions and job growth have unleashed a pent-up demand,” Lawrence Yun, NAR chief economist, said in a statement. “Most areas are drawing down housing inventory, which has shifted the supply/demand balance to sellers in much of the country. Over the near term, rising contract activity means higher home sales.”
Revised figures tomorrow may show the economy expanded at a 0.5 percent annualized pace in the fourth, according to the median forecast in a Bloomberg survey. While better than the 0.1 percent contraction initially estimated last month, it would still represent the slowest pace of growth in almost two years.
The biggest drop in federal defense outlays since the closing years of the Vietnam War and smaller gains in inventories held the economy back at the end of 2012.
Business investment was a bright spot last quarter as spending on equipment and software grew at a 12.4 percent rate, the fastest in more than a year.
The gains may be sustained later this year as orders are filled. Bookings excluding volatile transportation equipment, like commercial and military aircraft, climbed in January for a fifth consecutive month, representing the longest string of gains since an eight-month stretch through March 2006. They were projected to increase 0.2 percent, according to the Bloomberg survey median.
A global economy that is regaining its footing should help support American producers. Goods exports climbed in December to the second-highest level in records back to 1992, Commerce Department figures showed Feb. 8.
“We expect demand to remain stable in North America as the economy here appears to be improving modestly,” Gardner Denver’s Larsen said. While Europe is still struggling, “China appears to be improving from the lows of last year. We believe that this moderate growth will improve throughout the year and lead to a stronger second half.”
This quarter, it may be difficult to match the jump in business spending seen in the last three months of 2012. Shipments of non-defense capital goods excluding aircraft, used in calculating gross domestic product, decreased 1 percent in January after being little changed in December.
That data may be subject to difficulty in adjusting the data for seasonal adjustment. The shipments figures have dropped in the first month of a quarter in 11 of 13 periods since 2010, before bouncing back in most cases.
To ensure the expansion maintains traction, Federal Reserve policy makers have pursued unprecedented monetary easing. Fed Chairman Ben S. Bernanke yesterday, testifying before the Senate Banking Committee, defended the Fed’s $85 billion a month in asset purchases and near-zero target interest rate, saying that “monetary policy is providing important support to the recovery.”
“Notably, keeping longer-term interest rates low has helped spark recovery in the housing market and led to increased sales and production of automobiles and other durable goods,” he said.
--With assistance from Michelle Jamrisko and Chris Middleton in Washington. Editors: Carlos Torres, Vince Golle