U.S. Durable Orders Rose 2.2% in September -- 2nd Update

By Harriet TorryFeaturesDow Jones Newswires

Robust demand for long-lasting U.S. factory goods suggests business investment is strengthening, contributing to broader economic growth.

New orders for durable goods -- products designed to last at least three years, like dishwashers and aircraft -- rose a seasonally adjusted 2.2% in September from a month earlier, the Commerce Department said Wednesday.

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That exceeded economists' expectations for a 0.8% increase and marked the second month in a row of higher orders, suggesting manufacturers in the U.S. headed into the fourth quarter on a strong footing. Orders are a closely watched leading indicator of economic activity.

In both September and August, orders were boosted by increases in the extremely volatile civilian-aircraft category. Wednesday's report offered evidence that underlying business investment, beyond aircraft, is robust. New orders for nondefense capital goods excluding aircraft, considered a proxy for business spending on equipment, rose 1.3%, the third consecutive monthly gain of that size.

Unexpected strength in durable inventories and shipments of capital goods in Wednesday's report prompted forecasting firm Macroeconomic Advisers to raise its estimate for third-quarter gross domestic product, the broadest measure of U.S. output, to 3.0% from 2.7%. The Commerce Department will release its initial GDP reading on Friday. Economists polled by The Wall Street Journal expect a 2.7% annual rate of expansion.

This year's rise in spending comes after particularly weak investment from 2014 to 2016, resulting from a confluence of factors including weak global demand and falling energy prices.

Strong investment could lead the Federal Reserve to raise interest rates again before year-end. Policy makers will meet on Tuesday and Wednesday next week for their penultimate scheduled policy gathering of 2017. At their most recent policy meeting Sept. 19-20, Fed officials left rates unchanged in a range between 1% and 1.25% and penciled in one more quarter-percentage-point rate rise in 2017.

Signs of healthy business spending, and a low 4.2% unemployment rate, should help offset the Fed's concerns about weak inflation.

"Business investment has strengthened this year following surprising weakness in 2016," Fed Chairwoman Janet Yellen said on Oct. 15 in Washington, D.C., adding officials expect "the ongoing strength of the economy will warrant gradual increases" in the benchmark federal-funds rate.

Solid fundamentals are pushing companies to pick up spending on transportation equipment and technology. Caterpillar Inc. on Tuesday posted stronger-than-expected third-quarter revenue and profit growth amid growing demand for construction and mining equipment, and the machinery producer raised its sales and profit forecast for the year.

September's higher durable-goods figures were led by a 5.1% rise in transportation equipment orders, the biggest increase since June. Orders for civilian airplanes and parts rose 31.5%, reflecting strong demand for the nation's largest aerospace firm, Boeing Co. It had 72 orders in September, up from 33 in August. Separately, Boeing said Wednesday that demand for its single-aisle jets could merit a further rise in production, as it reported forecast-beating third-quarter earnings alongside a modest boost to its profit and cash flow guidance for the year.

Signs of healthy business demand for capital goods like transportation and communications equipment in Wednesday's durable goods report follow other positive gauges on U.S. manufacturing activity. A private-sector gauge of manufacturing activity produced by the Institute for Supply Management in September hit its highest reading since May 2004.

That improvement came despite the effects of recent major hurricanes. The Commerce Department this month reiterated that it couldn't isolate the impact of Hurricanes Harvey and Irma, which battered the U.S. in late August and September, on durable goods orders. The Federal Reserve earlier said that Hurricane Harvey contributed to a sharp decline in U.S. industrial production in August, but output rebounded in September.

Write to Harriet Torry at harriet.torry@wsj.com

(END) Dow Jones Newswires

October 25, 2017 15:02 ET (19:02 GMT)