Wed Aug 25, 2004
By Jonathan Nicholson

WASHINGTON (Reuters) - Orders for U.S. durable goods posted a larger-than-expected rise in July, but new home sales showed signs of buckling under the weight of higher interest rates, two government reports showed on Wednesday.

Orders for long-lasting goods gained 1.7 percent in July, their biggest monthly increase since March, the Commerce Department said. Orders aside from transportation were up a smaller 0.1 percent. June durables orders were revised up, to a 1.1 percent advance from a previously reported 0.9 percent jump.

The July number was well above Wall Street expectations for a 1.0 percent overall gain. While the number was above forecasts, economists were concerned most of the rise was in one sector.

Two other reports raised the prospect that higher interest rates are reducing demand for housing, which has been one of the U.S. economy's bulwarks.

U.S. stock markets looked past the data, instead rising on a decline in troublesome oil prices. The Dow Jones industrial average rose 83 points. Prices for U.S. Treasury securities also rose, as traders saw the numbers dampening the outlook for economic growth.

The Commerce Department said July new home sales slid to 6.4 percent to a 1.134 million annual rate, their slowest pace since December. Analysts had expected a 1.29 million pace.

In a separate report, the Mortgage Bankers Association said new applications for U.S. home loans fell last week. The group's market index, a measure of mortgage activity, declined 6.3 percent last week to 646.3 from the previous week's 689.4.

"The decline in new home sales is not alarming because it's still above one million units. That's still pretty strong," said Ashraf Laidi, chief currency analyst with MG Financial in New York.

"But if we see the fall extend itself, then one could include the housing sector in this soft patch."

TAILWIND FOR ORDERS

In the durables report, overall transportation-related orders rose 5.6 percent, as orders in the volatile civilian aircraft category more than doubled from June's tally, offsetting declines in demand for autos and military aircraft.

"Business investment growth is steady and a strong increase in new orders for machinery and primary metals indicates that the industrial recovery continues to have momentum in spite of economic concerns such as high oil prices, weak job growth outside of manufacturing, uneven global growth and geopolitical concerns," said Clifford Waldman, economist for the Manufacturers Alliance/MAPI, a Virginia trade group.
U.S. plane manufacturer Boeing Co. (BA.N: Quote, Profile, Research) said in July it had reached tentative deals with two dozen customers for its planned 7E7 jets.

The U.S. manufacturing sector has shown signs of regaining steam in recent months after being hit hard by the 2001 recession. From January 2001 through July, about 2.7 million U.S. factory jobs have been lost.

Recently, however, the job picture has stabilized and output, driven by a boom in worker productivity, has increased. The Federal Reserve said U.S. factories ran at their fastest operating rate in more than three years in July.

RATE WEIGHT

Mortgage rates began to creep upward in early summer on expectations the U.S. economy was strengthening. The average rate on a 30-year conventional mortgage was 6.06 percent in July, up from a low of 5.23 percent in June 2003, according to data from Freddie Mac.

"I do think housing is in the period of peaking cyclically, which makes sense when interest rates were at a trough. Housing got as high as it could go in the second half of last year and the first part of this year," said Alan Levenson, chief economist with T. Rowe Associates in Baltimore,

Housing is closely watched because it affects consumer spending. Newly minted home owners often boost spending to furnish and decorate their new homes.

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