By Eric Morath

WASHINGTON -- A steep drop in defense-related orders caused demand for long-lasting goods to decline in December, but underlying figures suggest the manufacturing sector is stabilizing.

Orders for durable goods -- products designed to last longer than three years, such as machinery or minivans -- fell 0.4% from a month earlier to a seasonally adjusted $227.02 billion, the Commerce Department said Friday.

The decline was unexpected. Economists surveyed by The Wall Street Journal had forecast a 2.3% increase in overall orders. But orders for defense capital goods, a highly volatile category, fell 33.4% last month, the largest one-month drop since May 2014.

Excluding defense, orders rose a healthier 1.7% in December from November.

For all of 2016, overall durable-goods orders fell 0.3% from the prior year.

The latest data show manufacturers in the U.S. had a lackluster 2016. However, December figures indicate demand stabilized somewhat in the later part of the year.

An important proxy for business investment, orders for nondefense capital goods excluding aircraft, rose 0.8% last month, the third straight monthly increase. Orders in the category still fell for the year.

"Prospects for future activity look better than they have in some time," said Mickey Levy, economist at Berenberg Capital Markets. Unfilled orders for the same capital goods category are also on an upward trend, "pointing to the need for companies to increase activity for what seems to be better demand."

Growth in business investment lagged behind broader economic growth for most of last year, suggesting firms remained cautious. But investment accelerated in the fourth quarter, according to a separate Commerce Department report.

Heading into 2017 and the start of President Donald Trump's administration, firms still face a mixed outlook. Some are optimistic proposed changes to the tax code and pledges to build more infrastructure will support the manufacturing base.

But the dollar has strengthened further since the election. A stronger dollar causes domestic-made goods to be relatively more expensive for foreign buyers. And trade policy is in flux, providing a fresh reason for uncertainty.

"I expect a friendlier policy environment to spur an acceleration in investment outlays in 2017," said Stephen Stanley, economist at Amherst Pierpont Securities. "Though the full unleashing of pent-up activity may not come until corporate tax reform makes its way through Congress."

Demand from consumers for vehicles has been relatively strong, partially helping to offset uneven overseas orders for manufactured goods.

Orders for motor vehicles and parts rose 2% in December, and were up 2.7% in 2016 versus 2015.

Orders for civilian aircraft, another highly volatile category, rose 42.4% in December from a month earlier. That reflected strong year-end demand for the nation's largest aerospace firm, Boeing Co., after a weak November.

Outside of transportation, orders rose 0.5% in December, but were down 0.3% for the full year.

Overall durable orders for November from the prior month were revised to a 4.8% decline, from a previous estimate of down 4.5%.

Write to Eric Morath at eric.morath@wsj.com

(END) Dow Jones Newswires

January 27, 2017 11:10 ET (16:10 GMT)

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