U.S. business capex gauge rebound offers hope for factories

By Lucia Mutikani

WASHINGTON (Reuters) - A gauge of U.S. business investment plans rebounded solidly in June after two straight months of declines, suggesting the drag on manufacturing from capital spending cuts was starting to ebb.

The signs of a slight improvement in factory activity are a boost to the economic growth outlook heading into the second half of the year and support views the Federal Reserve will raise interest rates later this year.

"This could be a sign that manufacturing activity is starting to pick up again following the weak start to the year," said Daniel Silver, an economist at JPMorgan in New York.

The Commerce Department said on Monday non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, increased 0.9 percent last month after dropping 0.4 percent in May. Economists had expected these so-called core capital goods to increase 0.4 percent in June.

U.S. financial markets were little moved by the report as an 8.5 percent plunge in Chinese stocks overnight sparked concerns about the global economy. Stocks on Wall Street were trading lower, while prices for U.S. government debt rose on safe-haven bids. The dollar fell against a basket of currencies.

The Fed's policy-setting committee meets on Tuesday and Wednesday. Most economists expect the U.S. central bank will raise interest rates in September. The Fed has kept its short-term lending rate near zero since December 2008.

Deep investment spending cuts in the energy sector in the aftermath of a more than 60 percent plunge in crude oil prices last year have weighed on factory activity. But there are signs that the energy spending rout is nearing an end.

Data on Friday showed U.S. energy firms added 21 oil rigs last week, marking the third increase over the past 33 weeks and bringing the total rig count to its highest since late May.

Schlumberger Ltd <SLB.N>, the world's No. 1 oilfield services provider said last week it believed the North American rig count may be bottoming and that a slow rise in both land drilling and completion activity could occur in the second half of the year.

Schlumberger and rival Halliburton <HAL.N> have slashed their capital expenditure budgets for this year.

GLIMMERS OF HOPE

Pointing to some moderation in the impact of weak energy spending on manufacturing, the Dallas Fed, in a separate report on Monday, said its general business activity index improved for a second straight month in July. The index, however, remained in negative territory.

Even if the energy drag on manufacturing eases, activity will continue to be constrained by a strong dollar and slow global demand, which have hurt profits of multinational corporations such as Whirlpool Corp <WHR.N> and Caterpillar Inc <CAT.N>. The dollar has gained 14.6 percent against the currencies of the United States' main trading partners since June 2014.

"A base appears to be forming in orders, but it remains to be seen how reliable it is," said Chris Low, chief economist at FTN Financial in New York.

Shipments of core capital goods, which are used to calculate equipment spending in the government's gross domestic product

measurement, slipped 0.1 percent in June after a 0.3 percent fall in May.

While that suggests business spending probably weighed on second-quarter GDP, that is likely to be offset by strong inventory growth. A Reuters survey forecast second-quarter growth expanding at a 2.6 percent annual pace after output contracted at a 0.2 percent rate at the start of the year.

The government will release its second-quarter GDP snapshot on Thursday.

An 8.9 percent jump in transportation equipment boosted overall orders for durable goods - items ranging from toasters to aircraft that are meant to last three years or more - which increased 3.4 percent last month.

Transportation was buoyed by a 66.1 percent surge in aircraft orders, which reversed May's 31.6 percent plunge. Boeing <BA.N> reported on its website that it had received 161 orders last month, up from only 11 in May.

Orders for automobiles and parts edged up 0.2 percent after slipping 0.3 percent the prior month. Durable goods inventories increased 0.4 percent, the largest gain since last December, after falling 0.2 percent in May.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)