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Economic Data Confounds Experts
By Caren Bohan

WASHINGTON (Reuters) - A surprise drop in orders for costly U.S.-made goods in May cast doubts on hopes for a vibrant economic rebound, even as two reports on Wednesday showed booming home sales.

The latest data painted a mixed picture as Federal Reserve (news - web sites) officials met to consider cutting interest rates to 45-year lows.

U.S. durable goods orders sank 0.3 percent last month, the Commerce Department (news - web sites) said. Private economists forecast they would rise 0.8 percent.

The dollar value of orders tumbled to $168.3 billion, the lowest level since June 2002.

The stock market shrugged off the data and moved higher. The dollar fell as did bonds, after an initial rise.

"This report also reveals that the economy is truly facing considerable headwinds from the manufacturing sector," said Anthony Chan, chief economist at Banc Investment Advisors in Columbus, Ohio.

"Although the seeds are in place for an eventual recovery, the path to that recovery is still not within reasonable sight," Chan added.

The gloomy factory news was tempered somewhat by some upbeat housing data.

The Commerce Department said sales of new single-family homes climbed 12.5 percent in May to a record annual rate of 1.157 million units.

And the National Association of Realtors said sales of pre-owned homes jumped 1.2 percent in May to 5.92 million.

"Housing is the one economic sector that seems to be carrying the day while others struggle, and thank God for that," said Carl Tannenbaum, chief economist at LaSalle Bank in Chicago. "But how many laps can this particular runner go before it hands off the baton to another runner?"

A TALE OF TWO ECONOMIES?

The differing messages in the factory and housing data highlight a dilemma for the Fed. Its rate cuts appear to be giving a powerful push to the consumers sector, especially the housing market. Businesses, however, seem wary of investing, no matter how low borrowing costs fall.

"These housing numbers are just extraordinarily impressive," said Cary Leahey, at Deutsche Banc Alex. Brown in New York. "Buying a home is a big vote of confidence in the economy."

Yet companies remain reticent. "Businesses seem to want to wait and let the other guy go through the turnstile first," Leahey said.

Fed policy-makers were set on Wednesday to wrap up a two-day meeting on interest rates. Around 2:15 p.m. EDT (1815 GMT), the central bank will announce its rate decision. Analysts widely predict a cut but are split on whether it will be a quarter percentage point or a half point.

Either would take the cost of overnight funds to the lowest level since 1958. Short-term rates now stand at 1.25 percent.

Anticipation of yet another cut in officials rates has driven down long-term rates. Mortgage rates are hovering near 5-1/4 percent on 30-year loans -- the lowest in decades.

The Fed appears poised to ease again, not just because of concerns about weak growth, but also because of fear of deflation.

Prices are still rising in the economy overall but many areas of the factory sector face a lack of pricing power, and officials worry this could spread to other parts of the economy. Deflation can reinforce softness in demand as people delay purchases as they wait for prices to drop.

The durables report showed broad weakness, with orders falling for such categories as cars, communications equipment and machinery.

Excluding the volatile transportation sector, orders edged up 0.2 percent, much slower than the 1 percent gain projected by economists in a Reuters survey. Durable goods orders excluding defense-related products rose by 0.3 percent.

May marked the fourth time in six months that overall orders have fallen. In April, durable goods orders plunged 2.4 percent, revised down from a 2.3 percent drop.

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