U.S. durable goods orders for July blew away the Street’s expectations by a large margin today. Durable goods orders jumped 8.7% in July, up from a revised 4.5% decline in June.

Autos drove the numbers higher, up 7.5%, but BMO Nesbitt Burns notes that a surprising surge in machinery orders sparked a higher-than-consensus increase of 3.9%, excluding transports. “The results confirm the view of recent Fed speakers that capital spending was picking up in some sectors,” says BMO.

“This indicator is a volatile one but still gives firms and monetary policy-makers alike reason to be optimistic that the U.S. economy is slowly but surely gaining momentum, with implications for corporate profits and new hiring down the road,” says RBC Financial.

BMO says the rebound in capital goods orders was also an eyebrow raiser. “Even though equity markets were sinking for most of the month, non-defense capital goods, excluding aircraft – a good barometer of business investment – soared 8.1% in the month after a 6.3% decline in June. The trend in capital goods orders has shown steady if unspectacular improvement since November 2001, and posted its first year-over-year advance since November 2000.”

Shipments rose 3.1% more than offsetting the decline in June. Inventories of durable good continue to drop, having now declined for 18 straight months. However, BMO says, that with shipments just 2.5% above year-ago levels and the notable volatility of the data “it is too early to conclude that the corner has been turned. At the very least, the environment does not appear to be deteriorating.”

“Despite the gloomy outlook one hears constantly in the news, businesses are starting to invest in additional capacity again, believing as we do that business conditions next year will be markedly better than they have been so far this year. The two wild cards that threaten the outlook are the risk of war with Iraq and the risk that consumers throw in the towel,” offers RBC.

“U.S. durable goods orders soared in July, going a long way to support the contention of recent Fed speakers that the recovery is still progressing, and that no further rate action is needed at this time,” says BMO. “Although it’s still way to early for the Fed to consider hiking rates, this data all but nullifies the case for a rate cut. It also underscores the point that markets have been more pessimistic than warranted by the economic data,” agrees RBC.