By Lucia Mutikani
WASHINGTON (Reuters) - A gauge of U.S. business investment spending plans rose in May, a tentative sign that the manufacturing sector was stabilizing after hitting a soft patch in recent months.
But the lingering effects of lower oil prices and a strong dollar will continue to constrain factory activity for a while, economists say. Other data on Tuesday showed new home sales increased to a more than seven-year high in May.
Manufacturing is lagging an overall rebound in the economy after output shrank at the start of the year. Despite the weakness in factory activity, the Federal Reserve is expected to raise interest rates this year.
The Commerce Department said non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, rose 0.4 percent last month. These so-called core capital goods orders slipped 0.3 percent in April.
"We are still far from calling the all-clear for the manufacturing sector's recent soft patch. That said, today's increase in core orders offers some modest encouragement," said Sarah House, an economist at Wells Fargo (NYSE:WFC) Securities in Charlotte, North Carolina.
Fed Governor Jerome Powell said on Tuesday the economy was likely to strengthen in the second half of the year and could be ready for a rate hike in September and a second increase in December.
The dollar rallied against a basket of currencies on Powell's comments, while stocks on Wall Street were little changed. Prices for U.S. government debt fell also as safe-haven bids faded on hopes of a deal that could prevent Greece from defaulting on its debt.
Manufacturing, which accounts for about 12 percent of the U.S. economy, has been hurt by the strong dollar and investment spending cuts in the energy sector in the aftermath of a more than 60 percent plunge in crude oil prices last year.
The number of U.S. oil drilling rigs has dropped to near five-year lows, prompting oilfield companies like Schlumberger (N:SLB) and Halliburton (N:HAL) to slash their capital expenditure budgets for this year.
However, the pace of the decline in oil rig counts has slowed in recent weeks as crude prices edged higher. The dollar has gained about 12 percent against the currencies of the United States' main trading partners since June 2014, taking a bite out of the profits of multinational corporations.
Factories also have been hampered by businesses placing fewer orders while working through a stockpile of goods accumulated last year.
HOUSING SIZZLES
In a second report, the Commerce Department said new home sales rose 2.2 percent to a seasonally adjusted annual rate of 546,000 units in May, the highest level since February 2008. April's sales pace was revised sharply higher.
The report came on the heels of data on Monday showing home resales in May surged to a 5-1/2-year high. Data last week also showed building permits near an eight-year peak in May, while homebuilders were the most optimistic in nine months in June.
Housing is being buoyed by a strengthening jobs market, which is boosting household formation, and steps by the government to ease lending conditions for first-time buyers.
"This bodes well for consumption down the road with home buyers expected to stock their new abodes with appliances, carpeting and furniture," said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.
"This is just the kick-start the economy needs to continue to grow in the second half of the year."
The bullish new home sales report added to strong retail sales, consumer sentiment and employment data in suggesting the economy was gaining speed in the second quarter after gross domestic product contracted in the first three months of 2015.
Though manufacturing may be regaining its footing, a quick turnaround is probably unlikely. Overall orders for durable goods - items ranging from toasters to aircraft that are meant to last three years or more - fell 1.8 percent in May as transportation equipment orders dropped 6.4 percent.
Durable goods orders have been weak since last August.
There was a 35.3 percent plunge in civilian aircraft orders in May. Boeing (N:BA) reported on its website it had received 11 aircraft orders last month, a drop from 37 in April. Unfilled orders for durable goods fell 0.5 percent in May. Order books have declined in five of the last six months.
Durable goods inventories dropped last month after 23 straight monthly increases, suggesting restocking could be a drag on second-quarter growth. Goldman Sachs (NYSE:GS) trimmed its second-quarter GDP forecast by two-tenths of a percentage point to a 2.9 percent annual rate.
A third report from financial data firm Markit showing factory activity slowing to a more than 1-1/2-year low in early June also offered a cautionary note on manufacturing.