WASHINGTON, Jan 28 (Reuters) - New orders for key U.S.-manufactured capital goods increased more than expected in December, but business spending on equipment was likely muted in the fourth quarter after a strike at Boeing (BA.N), opens new tab disrupted aircraft deliveries.
Nonetheless, the report from the Commerce Department on Tuesday suggested business investment in equipment was poised to pick up in the first quarter. Spending could get a boost from plans by President Donald Trump's new administration to cut taxes and lower regulatory barriers, though tariffs on imported goods could be an obstacle.
While businesses are warming to increasing investment, consumers are growing more nervous about the labor market and less upbeat on the economy's prospects now and in the months ahead, which suggests some moderation in spending. Households also expect higher inflation and interest rates this year, another report showed.
"The economy will likely grow close to trend in the first quarter but could dip below trend if the job market softens faster than expected," said Jeffrey Roach, chief economist at LPL Financial.
Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, rose 0.5% after an upwardly revised 0.9% gain in November, the Commerce Department's Census Bureau said. Economists polled by Reuters had forecast these so-called core capital goods orders would climb 0.3% after a previously reported 0.4% rise in November.
Core capital goods orders advanced 0.6% on a year-on-year basis. Shipments of core capital goods increased 0.6% after climbing 0.4% in November.
There were rises in orders of machinery, electrical equipment, appliances and components as well as computers and electronic and fabricated metal products. But primary metals orders fell.
Orders for transportation equipment dropped 7.4%, amid a 45.7% tumble in commercial aircraft orders. Boeing reported on its website that it had received 142 aircraft orders in December, sharply up from the 49 in November. Most of the orders last month were for the 737 MAX planes.
Orders for motor vehicles and parts fell 0.2%. Overall orders for durable goods, items ranging from toasters to aircraft meant to last three years or more, declined 2.2% after decreasing 2.0% in November.
Non-defense capital goods orders fell 7.8% after dropping 3.2% in November. Shipments of these goods increased 3.5% after falling 0.9% in the prior month.
These shipments go into the calculation of the business spending on equipment component in the gross domestic product report. A crippling strike by factory workers at Boeing, which started in mid-September and ended in early November, disrupted production and delivery of aircraft.
Strong aircraft deliveries helped to boost business spending on equipment in the second and third quarters, despite the negative impact of higher interest rates on manufacturing.
"I have penciled in a substantial drop in business investment in equipment for the fourth quarter ... driven in large part by the fallout from the Boeing strike," said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets.
The government is scheduled to publish its first GDP estimate for the fourth quarter on Thursday.
A Reuters survey of economists forecasts GDP increased at a 2.6% annualized rate last quarter. The economy grew at a 3.1% pace in the third quarter.
The economy is expanding well above the 1.8% that Federal Reserve officials regard as the non-inflationary growth pace.
The U.S. central bank is expected to leave its benchmark overnight interest rate in the 4.25%-4.50% range at the end of a two-day policy meeting on Wednesday, having reduced it by 100 basis points since September. The policy rate was hiked by 5.25 percentage points in 2022 and 2023 to curb high inflation.
Stocks on Wall Street traded higher on Tuesday. The dollar rose against a basket of currencies. U.S. Treasury yields rose.
CONSUMER CONFIDENCE EBBS
Business and consumer sentiment picked up following Trump's victory in the Nov. 5 presidential election, but the new administration's proposed immigration and trade policies are expected to stoke inflation and limit the Fed's ability to continue cutting rates this year.
"There is some talk in the markets that companies may have accelerated investment projects to beat imminent tariffs on imported goods after the Trump inauguration," said Carl Weinberg, chief economist at High Frequency Economics.
The election euphoria appears to be fizzling out, at least among consumers. The Conference Board's consumer confidence index fell to 104.1 in January from 109.5 in December, marking the second straight monthly decline. Economists had forecast the index would rise to 105.6.
The weaker confidence reading occurred amid renewed worries about the labor market as well as expectations of higher inflation and borrowing costs. The survey was concluded on Jan. 20, when Trump was sworn in for a second term in the White House.
It mirrored the drop reported last week in the University of Michigan's consumer sentiment reading. The deterioration in confidence was led by consumers under 55 years old and dropped sharply among households with annual incomes above $125,000.
The share of consumers reporting that jobs were "plentiful" fell to 33% from 37.1% in December. The proportion that viewed jobs as "hard-to-get" increased to 16.8% from 14.9 last month. The survey's so-called labor market differential, derived from data on respondents' views on whether jobs are plentiful or hard to get narrowed to 16.2 from 22.2 in December.
This measure correlates to the unemployment rate in the Labor Department's monthly employment report. The jobless rate was at 4.1% in December.
Consumers' average 12-month inflation expectations increased to a six-month high of 5.3% from 5.1% in December. Dana Peterson, the Conference Board's chief economist, noted that "references to inflation and prices continue to dominate write-in responses."
More than half of consumers anticipated higher interest rates this year. Plans to buy motor vehicles over the next six months were the lowest in five months as were those to purchase a home. Vacations plans fell to the lowest level since last October.
But there could be some respite for potential homebuyers. House prices increased 4.2% on a year-on-year basis in November after advancing 4.5% in October amid rising supply, a third report from the Federal Housing Finance Agency showed.
"Some house price relief may be on the way," said Colin Johanson, an economist at Barclays.
Reporting by Lucia Mutikani; Editing by Chizu Nomiyama, Andrea Ricci and Paul Simao