Four thousand U.S. dollars are counted out by a banker counting currency at a bank in Westminster, Colorado November 3, 2009.

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Washers and dryers are seen on display at a store in New York July 28, 2010.

WASHINGTON | Fri Dec 21, 2012 8:38am EST

WASHINGTON (Reuters) - A gauge of planned U.S. business spending rose much more than expected in November, a hint that worries over tighter fiscal policy may not be holding back the factory sector as much as feared.

The Commerce Department said on Friday that non-defense capital goods orders excluding aircraft, a closely watched proxy for investment plans, jumped 2.7 percent last month, the second straight month of solid gains.

Economists had expected so-called core capital goods orders to rise just 0.3 percent. The reading for October was upwardly revised to a 3.2 percent gain from a previously reported 2.9 percent increase.

Shipments of non-defense capital goods orders excluding aircraft, used to calculate equipment and software spending in the gross domestic product report, gained 1.8 percent.

The Commerce Department gave no indication that Superstorm Sandy, which lashed the East Coast in late October, had any impact on the data.

Many economists believe businesses are cutting back on capital spending, wary of automatic government spending cuts and tax increases scheduled to kick in early next year unless the U.S. Congress and the Obama administration can agree on a plan to avert this so-called "fiscal cliff."

Going over the cliff could drain about $600 billion from an already fragile economy.

Overall durable goods orders rose 0.7 percent in November, with increases posted for machinery, fabricated metal products, and computer and electronic products offsetting a drag from aircraft.

Economists polled by Reuters had forecast orders for durable goods, items from toasters to aircraft that are meant to last at least three years, rising 0.2 percent last month.

Excluding transportation, orders rose 1.6 percent in November. Transport orders were down 1.1 percent. Previously, U.S. manufacturer Boeing reported new orders for its aircraft fell in November to 124 from 152 in the prior month.

New orders for autos jumped 3.5 percent. U.S. auto sales in November raced to a five-year high for that month on a rebound from storm-ravaged October and the need to replace aging vehicles.

(Reporting by Jason Lange; Editing by Andrea Ricci)

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1 of 3. U.S. President Barack Obama speaks about the fiscal cliff at the White House in Washington December 21, 2012.

WASHINGTON | Fri Dec 21, 2012 11:43pm EST

WASHINGTON (Reuters) - The White House on Friday tried to rescue stalled talks on a fiscal crisis after a Republican plan imploded in Congress, but there was little headway as lawmakers and President Barack Obama abandoned Washington for Christmas.

In remarks before flying to Hawaii for a break, Obama suggested reaching a short-term deal on taxes and extending unemployment insurance to avoid the worst effects of the "fiscal cliff" on ordinary Americans at the start of the New Year.

"We've only got 10 days to do it. So I hope that every member of Congress is thinking about that. Nobody can get 100 percent of what they want," said Obama.

Obama said he wanted to sign legislation extending Bush-era tax cuts for 98 percent of Americans in the coming days.

The Democrat appeared to be offering bickering lawmakers a way to fix the most pressing challenge - tax cuts that expire soon - while leaving thorny topics such as automatic spending cuts or extending the debt ceiling for later.

Obama called on lawmakers to use the holiday break to cool off frayed nerves, "drink some eggnog, have some Christmas cookies, sing some Christmas carols," and come back next week ready to make a deal.

Negotiations were thrown into disarray on Thursday when House of Representatives Speaker John Boehner failed to convince his fellow Republicans to accept tax cuts for even the wealthiest of Americans as part of a possible agreement with Obama.

"How we get there, God only knows," Boehner told reporters on Friday when asked about a possible comprehensive fiscal cliff solution.

If there is no agreement, taxes would go up on all Americans and hundreds of billions of dollars in automatic government spending cuts would kick in next month - actions that could plunge the U.S. economy back into recession.

Obama spoke to Boehner on Friday and held a face-to-face White House meeting with the top Democrat in Congress, Senate Majority Leader Harry Reid.

Before his defeat in Congress, Boehner had extracted a compromise from Obama to raise taxes on Americans making more than $400,000 a year, instead of the president's preference of those with income of $250,000 a year.

But with talks stalled on the level of spending cuts to which Obama would agree, Boehner attempted a backup plan to raise taxes only on those making more than $1 million a year - amounting to just 0.18 percent of Americans.

BAD DEFEAT FOR BOEHNER

Boehner's reverse in the House was worse than first thought. A key Republican lawmaker said Boehner scrapped the vote when he realized that between 40 and 50 of the 241 Republicans in the House would not back him.

Obama and his fellow Democrats in Congress are insisting that the wealthiest Americans pay more in taxes in order to help reduce federal budget deficits and avoid deep spending cuts. Republicans control the House and Democrats control the Senate.

Stocks dropped sharply early Friday on fears that the United States could go fall back into recession if politicians do not prevent it.

But major indexes lost less than 1 percent, suggesting investors still held out hope that an agreement will be brokered in Washington.

"I think if you get into mid-January and (the talks) keep going like this, you get worried, but I don't think we're going to get there," said Mark Lehmann, president of JMP Securities, in San Francisco.

Boehner, joined by his No. 2, Eric Cantor, at a Capitol Hill news conference, said the ultimate fault rests with Obama for refusing to agree to more spending reductions that would bring down America's $1 trillion annual deficit and rising $16 trillion debt.

"What the president has proposed so far simply won't do anything to solve our spending problem. He wants more spending and more tax hikes that will hurt our economy," Boehner said.

Democrats responded with incredulity.

House members, heading to their home states for the holidays, were instructed to be available on 48 hours notice if necessary.

"They went from 'Plan B' to 'plan see-you-later,'" Obama adviser David Axelrod said on MSNBC on Friday morning.

The crumbling of Boehner's plan highlights his struggle to lead some House Republicans who flatly reject any deal that would increase taxes on anyone.

Republican Representative Tim Huelskamp criticized Boehner's handling of the negotiations, saying the speaker had "caved" to Obama opening the door to tax hikes. Huelskamp, a dissident first-term congressman from Kansas, said he was not willing to compromise on taxes even if they are coupled with cuts to government spending sought by conservatives.

Fiscal conservatives "are so frustrated that the leader in the House right now, the speaker, has been talking about tax increases. That's all he's been talking about," Huelskamp said on MSNBC on Friday morning.

(Additional reporting by Roberta Rampton, Richard Cowan, Rachelle Younglai, Thomas Ferraro and Matt Spetalnick; Writing by Steve Holland; Editing by Alistair Bell and Lisa Shumaker)

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A shopper walks down an aisle in a newly opened Walmart Neighborhood Market in Chicago in this September 21, 2011 file photo.

NEW YORK | Fri Dec 21, 2012 10:21am EST

NEW YORK (Reuters) - Consumer sentiment slumped in December as Americans were rattled by on-going negotiations to avert the tax hikes and spending cuts set to come into effect in the new year, data showed on Friday.

The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment tumbled to 72.9 from 82.7 in November, worse than forecasts for 74.7.

It was the lowest level since July and also came in under December's preliminary figure of 74.5.

Talks to avoid the so-called fiscal cliff were thrown into disarray on Thursday evening when Republican lawmakers failed to back an effort by House of Representatives Speaker John Boehner that was designed to extract concessions from President Barack Obama.

Economists say the economy could fall back into recession next year if the changes are allowed to go into full effect.

Record numbers of consumers spontaneously mentioned their concerns that no resolution would be reached before year-end, the survey said.

"Even if something is passed in the next week, unless it includes an extension of the payroll tax holiday, as well as no increase in income taxes except for the wealthy, consumers are likely to be disappointed," survey director Richard Curtin said in a statement.

Of those surveyed, 27 percent said they were concerned about higher taxes, topping the prior high of 26 percent seen in August 2011 in the wake of the drawn-out debt ceiling debate.

U.S. stocks as measured by the SP500 index were down about 1.0 percent in morning trading as hopes faded that a fiscal deal would be reached soon.

Consumers were also less upbeat about the economic outlook, with 35 percent expecting unemployment to rise during 2013, up from 19 percent in October. Only one-third expected an uninterrupted economic expansion over the next five years.

The barometer of current economic conditions slipped to 87.0 from November's 90.7, while the gauge of consumer expectations fell to 63.8 from 77.6.

The survey's one-year inflation expectation edged up to 3.2 percent from 3.1 percent, while the survey's five-to-10-year inflation outlook rose to 2.9 percent from 2.8 percent.

(Reporting by Leah Schnurr)

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The U.S. Capitol Building stands in Washington December 17, 2012.

LONDON | Fri Dec 21, 2012 7:28am EST

LONDON (Reuters) - Global investors are betting Washington will overcome its budget deadlock despite an apparently serious setback.

If they are wrong, there could be a sharp market reaction and the U.S. dollar and Treasury bonds would be among the main beneficiaries, making for a very different dynamic to the euro zone crisis, where bond market pressure was instrumental in forcing policymakers to act.

Republican lawmakers rejected a proposal on Thursday by their leader, House of Representatives Speaker John Boehner, designed to extract concessions from President Barack Obama.

It threw into disarray attempts to head off $600 billion worth of tax hikes and spending cuts that could push the U.S. economy into recession.

The dollar climbed versus the euro, stocks slid from Tokyo to London and safe haven government bonds rose but in only muted fashion, indicating a continued belief that a deal will be done.

Is this sensible or complacent?

Jeffrey Rosenberg, chief investment strategist for fixed income at BlackRock, said the only approach was to "hope for the best, but plan for the worst".

"Given the much greater downside from a fiscal cliff failure than upside from success, we continue to maintain our tactical defensive positioning," Rosenberg said.

If differences between Republicans and Democrats cannot be bridged, the dollar -- counter intuitively to the layman's eye -- would attract safe haven flows as the world's reserve currency. The yen could do even better despite the new Japanese government's intent on more forceful monetary and fiscal easing.

"The dollar goes up when people get more nervous because the reflex in the market is to assume it's a safe haven, there's very little consideration given to the nature of the crisis," said Daragh Maher, FX strategist at HSBC.

"If the U.S. is heading towards recession it's not good for anyone, therefore if I have to hold something I may as well hold the dollar. That's how the sequence of logic goes."

Obama and Boehner aim to reach a deal before the New Year, when taxes will automatically rise for nearly all Americans and the government will have to scale back spending on domestic and military programs. The politicians are now in recess until at least December 27.

"The time left to seal a deal is limited," said Kit Juckes at Societe Generale in London.

There is, however, good reason not to panic since the term "fiscal cliff" is somewhat misleading. America will not crash off it on January 1. The tightening process will be more gradual.

The head of G10 FX Strategy at one bank in London said it was much more of a slope than a cliff. "The market's working assumption has been all along that it's going to go right down to the wire, and then they're going to cut a deal."

Hong Hao, Bank of Communications International Securities' chief equity strategist in Hong Kong, said: "If I were a fund manager, I would be looking to lock in gains and going off for the holidays. The U.S. will eventually come to a deal, maybe just not by their self-imposed deadline."

NO BOND PRESSURE

As with the euro debt crisis, the markets could offer a natural check and balance -- if their reaction turns savage, it might pressure a divided Washington to come together.

The difference is that, as with the dollar, U.S. government bonds are viewed as a harbor from risk, so the bond market pressure brought to bear on the euro zone is unlikely to be replicated in this case.

"Although trading at all-time lows, treasury yields could benefit both from renewed equity volatility and the short-term economics after any resolution," said Edward Smith, global strategist at Collins Stewart Wealth Management.

Unlike the euro zone periphery, shunning U.S. assets is not really an option, not least because global markets tend to correlate closely with Wall Street anyway.

For Juckes, the latest standoff in Washington could go two ways: The weakening of Boehner's position could strengthen Obama's hand, particularly since he has already given ground. Alternatively, the Republicans may now be so divided that they cannot back any sort of deal that raises taxes on the wealthier.

The optimists would buy equities and the euro on any dip, he said. "(They) will look at the improving tone to U.S. data and at the vast amount of money that needs investing."

If the glass-half-full view prevails and the world economy starts looking up, Reuters asset allocation polls show major investors are looking to areas that underperformed this year -- notably the Chinese stock market, one of the few major bourses in the red for 2012.

After two years in which the stock markets of the emerging giants underperformed, Russia and Brazil also have backers.

For now, most investors seem to be hoping for the best rather than altering their strategies.

"If it turns out that there's a poor agreement delaying a number of issues until the spring but skating away from the immediate catastrophe of January, or no agreement at all, that clearly is not priced into market expectations," said Andrew Milligan, head of global strategy at Standard Life Investments, which has 163.4 billion pounds of assets under management.

"I think (a lack of agreement) would encourage people even more to go into the dividend yield type stocks ... And clearly the stocks that are more associated with global trade would be the ones that investors would be pulling back from," he said.

(Reporting by Sinead Cruise, Sujata Rao, Nia Williams, Tricia Wright, Richard Hubbard and Clement Tan. Editing by Jeremy Gaunt.)

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