U.S. business spending weakens, but consumers upbeat

By Lucia Mutikani

WASHINGTON (Reuters) - A gauge of U.S. business investment plans fell for a fourth straight month in December, a potential sign that slowing global growth and falling oil prices were weighing on the economy.

Other data on Tuesday, however, suggested any damage would be limited. Consumer confidence vaulted to a near 7-1/2 high in January and new home sales in December hit their highest level since June 2008.

"The drop in (capital spending) will weigh on growth, though stronger consumer spending should keep GDP from slowing too much," said Chris Low, chief economist at FTN Financial in New York.

The Commerce Department said non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, dropped 0.6 percent last month after a similar decline in November.

Orders for these so-called core capital goods starting decreasing in September, the longest downward stretch since 2012.

Economists, who had expected a 0.5 percent gain, said the surprise drop last month likely reflected weak overseas demand for a wide range of capital goods and declining demand at home for energy-related equipment. They also cited a strengthening dollar as a factor.

The dour report came as construction and mining equipment maker Caterpillar Inc (N:CAT) reported a nearly 25 percent decline in fourth-quarter profit and warned that falling oil prices would hurt its business in 2015.

A number of U.S. producers already have curtailed drilling activity and announced job cuts amid an oil glut that has slashed crude prices by about 60 percent since June.

Dollar strength is also undermining corporate profits. Procter & Gamble Co (N:PG), the world's largest household products maker, pointed to the dollar and said full-year sales were likely to fall 3 percent to 4 percent. Chemicals company DuPont (N:DD) also forecast lower operating earnings for 2015.

Microsoft Corp (O:MSFT) on Monday said the dollar was a factor behind a decline in its quarterly earnings as well.

Weak equipment spending is likely to catch the attention of Federal Reserve officials, who have been eyeing mid-year for a possible interest rate hike. Fed officials started a two-day policy meeting on Tuesday.

"This is ... evidence that the dollar's strength is starting to show up in terms of weaker orders, a new soft spot for manufacturing that perhaps will give some of the policymakers pause if not worry," said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.

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WEAK SHIPMENTS

The downbeat data overshadowed a separate report from the Conference Board showing consumer sentiment this month jumped to its highest level since August 2007.

U.S. stocks fell sharply, while prices for U.S. Treasury debt soared, with the yield on the 30-year bond falling to a record low. The dollar weakened against a basket of currencies.

Shipments of core capital goods, which are used to calculate equipment spending in the government's gross domestic product measurement, fell 0.2 percent last month after slipping 0.6 percent in November and 0.9 percent in October.

Economists said that suggested a downside risk to their fourth-quarter GDP estimates, most of which currently hover around a 3 percent annual pace. The government will publish its first snapshot of fourth-quarter growth on Friday.

With core capital good orders falling, overall orders for durable goods - items ranging from toasters to aircraft that are meant to last three years or more - tumbled 3.4 percent in December. It was the fifth straight monthly decline.

Still, the economy appears to be in reasonable health. Services sector activity picked up in January for the first time since June, financial data firm Markit said separately.

Another report from the Commerce Department showed new home sales jumped in December to their highest level since 2008. The increase came as mortgage rates trended lower, fueling a jump in home loan applications this month.

"January's impressive surge in mortgage applications suggests we may see continued momentum in new home sales," said Derek Lindsey, an analyst at BNP Paribas in New York. A fourth report, however, showed a deceleration in house price gains. The S&P/Case Shiller composite index of 20 metropolitan areas rose 4.3 percent in November from the prior year, the slowest since October 2012.