U.S. manufacturing still weak; labor market flexes muscle

By Lucia Mutikani

WASHINGTON (Reuters) - New orders for long-lasting U.S. manufactured goods fell in February as the sector continued to struggle with the lingering effects of a robust dollar and lower oil prices.

While other data on Thursday showed an increase in the number of Americans filing for unemployment benefits last week, revisions to the prior weeks' figures showed the labor market was much stronger than previously thought.

The resilience of the labor market has helped calm fears the economy was heading into a recession, and the combination of tightening labor market conditions and firming inflation likely keeps the Federal Reserve on course to steadily raise interest rates this year.

"The economy continues to hold its own despite a slowdown in many other countries around the world. The Fed can continue with its policy of gradual rate hikes," said Chris Rupkey, chief economist at MUFG Union Bank in New York.

The Commerce Department said orders for durable goods, items ranging from toasters to aircraft meant to last three years or more, declined 2.8 percent last month after increasing 4.2 percent in January. Durable goods orders have decreased in three of the last four months.

Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, fell 1.8 percent after advancing by a downwardly revised 3.1 percent in January. These so-called core capital goods orders were previously reported to have increased 3.4 percent in January.

Economists polled by Reuters had forecast durable goods orders falling 2.9 percent last month and orders for core capital goods slipping 0.1 percent.

U.S. stocks fell on the data and weaker oil prices. The dollar rose against a basket of currencies after St. Louis Fed President James Bullard said another U.S. interest rate "may not be far off." Prices for U.S. Treasuries were mixed.

The U.S. central bank increased its short-term interest rate in December for the first time in nearly a decade.


In a separate report, the Labor Department said initial claims for state unemployment benefits rose 6,000 to a seasonally adjusted 265,000 for the week ended March 19.

The government also revised data going back to 2011, which showed claims generally trending lower than previously reported. Claims for the week ended March 5 were the lowest since November 1973. The low level of claims has economists anticipating another month of strong job gains in March after nonfarm payrolls increased by 242,000 in February.

"The U.S. jobs market remains solid. With a tighter jobs market, more people are looking for work and employers are raising wages, both good news for consumer spending and the overall economy in 2016," said Gus Faucher, deputy chief economist at PNC Financial Services in Pittsburgh.

Strong domestic demand is helping to offset some of the drag on manufacturing from weak global consumption. Despite February's drop in durable goods orders, there are signs the downward spiral in manufacturing is drawing to an end.

Several reports in recent days have shown a pick-up in regional factory activity in March, leading to optimism that a broader manufacturing survey will show the sector expanded this month for the first time since September.

"We are putting a low weight on this (durable goods orders)report in judging the short-term state of manufacturing activity," said John Ryding, chief economist at RDQ Economics in New York.

Manufacturing, which accounts for 12 percent of the U.S. economy, has been hammered by the buoyant dollar, weak global demand and capital spending cuts by oilfield service firms like Schlumberger <SLB.N> and Halliburton <HAL.N>.

Efforts by businesses to sell unwanted inventory have also meant fewer orders placed, adding to pressure on factories. But the dollar's gains versus the currencies of the United States' main trading partners <.DXY> have slowed since the start of the year and the oil price slide has become less pronounced.

The drop in durable goods orders last month was broad-based.

Shipments of core capital goods - used to calculate equipment spending in the gross domestic product report – fell 1.1 percent last month after sliding 1.3 percent in January.

The February shipments drop led economists to cut their first-quarter GDP growth estimates by as much as four-tenths of a percentage point to as low as a 1.4 percent annualized rate.

The economy grew at a 1.0 percent rate in the fourth quarter, according to data released last month. The Commerce Department is due on Friday to release its final fourth-quarter GDP estimate.

"GDP growth will not be getting much help from business spending in the near future," said Tim Quinlan, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

(Reporting by Lucia Mutikani; Editing by Paul Simao)