Companies Ordered More Factory Goods in May

Businesses requested more airplanes, autos, and oil drilling equipment in May. The jump in factory orders after a sluggish spring suggests supply disruptions stemming from the Japan crisis are fading.

Factory orders rose 0.8 percent in May, the Commerce Department said Tuesday. That followed a downwardly revised drop of 0.9 percent in April.

The increase pushed factory orders to $445.3 billion. That's almost 32 percent higher than the low point during the recession, reached in March 2009.

Much of the increase was driven by a 36.5 percent increase in orders for aircraft, a volatile category. But there were also signs of strength in areas that had slowed sharply in the previous month.

Auto and auto parts orders rose 2 percent. And a measure of business investment rose 1.6 percent, after falling 0.4 percent the previous month. Companies invested more in computers and equipment.

Orders for so-called nondurable goods, such as food, clothing, oil, and plastics, fell 0.2 percent in May. But that was partly because oil prices dropped.

Until this spring, manufacturing had been one of the strongest sectors of the economy since the recession ended two years ago.

Economists largely blamed the weak period on high gas prices and the impact of the March 11th earthquake in Japan, which led to a parts shortage that has hampered U.S. manufacturers.

Those factors appear to be easing. Gas prices have come down since peaking in early May. And the manufacturing sector expanded at a faster pace in June after slowing sharply in May, according to the Institute of Supply Management.

"There are encouraging signs that the second half will likely to get better, particularly for manufacturers," said Ryan Sweet, an economist at Moody's Analytics.

The economy is expected to grow at a 3.2 percent in the second half of this year, according to an Associated Press survey of 38 top economists.

Growth must be stronger to significantly lower the unemployment rate, which was 9.1 percent last month. The economy would need to grow 5 percent for a whole year to significantly bring down the unemployment rate. Economic growth of just 3 percent a year would hold the unemployment steady and keep up with population growth.

The government reports Friday on hiring data in June. Economists expect the economy added only 90,000 jobs and the unemployment rate was unchanged, according to survey by FactSet.

Debt Deal: Spending Cuts Expected

Huge spending cuts, and maybe some targeted tax hikes, are expected to be agreed upon before raising the U.S. debt ceiling. Details are thin, as negotiations have been carried out behind closed doors and involve only a few of Washington's heaviest hitters.

The group of lawmakers who participated in negotiations led by Vice President Joe Biden have already identified more than $1 trillion in budget cuts, but Republicans want more.

"It sounds as if the package is going to be all spending cuts with a few symbolic revenue increases," said Isabel Sawhill, an economist who studies fiscal issues at the Brookings Institution and worked in the Clinton administration.

The $1 trillion in cuts would probably be spread out over the next decade or so, meaning roughly $100 billion less in federal spending each year, although the savings might be larger in later years.

Sawhill said the cuts are likely to be focused on non-security discretionary spending, a small section of the budget that includes funding for food inspectors, the FBI and education grants, among many other programs and services people associate with government.

"The public is going to be a lot more concerned when they see the details and not just the abstraction of less spending," Sawhill said.

That's something Obama clearly has on his mind as well. He made the point in a press conference this week.

"I've said to some of the Republican leaders, you go talk to your constituents, the Republican constituents, and ask them are they willing to compromise their kids' safety so that some corporate jet owner continues to get a tax break," Obama said. "And I'm pretty sure what the answer would be."

On the revenue side, the White House wants to close loopholes that benefit the owners of private jets, and raise taxes on hedge fund managers who pay lower tax rates on so-called "carried interest."

Additional proposals would change how business inventory is taxed, and eliminate government subsidies for oil and gas companies.

There is a common theme. The proposals spare the middle class and instead focus on corporations and the wealthy. The White House says they focus on "unnecessary" and "unjustifiable" tax breaks.

Dow Has Best Week in 2 Years

Last week the Dow rose 648 points, its best week in two years, after Nike reported strong earnings and Greece cleared its final hurdle before receiving another round of loans. Automakers also reported that their sales rose 7 percent in June, compared to a year ago.

The gains erased nearly six weeks of losses. Prior to last week stocks had been falling since late April because of concerns about the debt crisis in Europe, weak home sales in the U.S. and slowing manufacturing. By mid-June, stocks had given up most of their gains for the year.

With last week's rally, the Dow is now down just 1.8 percent from April 29, when it reached a three-year high. The Dow is up 8.5 percent for the year. The S&P 500 index and the Nasdaq composite are both up about 6 percent.

Analysts are optimistic about the corporate earnings reports that will start to come in next week. Earnings from companies in the S&P 500 index are expected to rise 14 percent from the same period a year ago, according to FactSet. Revenue is expected to rise 11 percent.

"There hasn't yet really been a reason to get concerned about corporate America," said Randy Warren, chief investment officer of Warren Financial Service. "It's the rest of the America that's struggling."

Even while companies have been reporting higher profits, unemployment has remained stubbornly high since the recession officially ended in June 2009. The Labor Department will report the latest figures on unemployment and payrolls on Friday, and analysts expect to hear more bad news. They forecast that the unemployment rate will remain unchanged from May at 9.1 percent. They also expect that employers added only 90,000 jobs last month, below the 100,000 threshold that economists say is needed to prevent the unemployment rate from increasing.

Several stocks rose sharply after deals were announced. Immucor Inc. rose 30 percent after the maker of blood-testing equipment agreed to be bought by private-investment firm TPG Capital in a deal worth $1.97 billion.

Southern Union Co. rose 2.9 percent after Energy Transfer Equity LP said it would pay $5.1 billion for the pipeline company. The deal trumped a $4.9 billion bid made in late June by rival Williams Cos.

Netflix Inc. rose 7.4 percent to $287.85 after announcing that it would expand its online video streaming service to 43 countries in Latin America and the Caribbean.